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‘This Matters Meaningfully’: Nomura’s McElligott Flags Inflection In Key ‘2020 Recession’ Indicator

"Stay tuned."

Sentiment is surging, even as the Fed is on the verge of creating restrictive conditions in an effort to apply the brake on a late-stage expansion that’s been turbocharged by deficit-funded stimulus.

That’s from a Wednesday morning post documenting the latest prognostications of SocGen’s incorrigible but exceedingly affable bear Albert Edwards.

The idea that the Fed may soon be forced (by the plunge into late-cycle stimulus) into engineering restrictive policy is a narrative that’s likely to get more traction going forward and one person who’s been keen on documenting the evolution of market pricing around that narrative is Nomura’s Charlie McElligott.

Ahead of the Fed, Charlie is out with a quick piece updating folks on where things stand and it’s worth taking note of how this situation has developed over the past couple of weeks coincident with a recently reinvigorated reflation story.

As a reminder, McElligott previously suggested that we may be less than a year away from the dreaded post-inversion steepening episode that usually presages trouble.

On Wednesday, Charlie revisits this, noting that “over the past few weeks, the EDZ9EDZ0 spread is now no-longer inverted.”



That, he says, is significant, as the inversion there is indicative of market consensus vis-a-vis the “2020 recession” narrative. Here’s McElligott putting the pieces together for you:

This matters meaningfully to me, as the former EDZ9EDZ0 inversion communicated that the market was pricing-in higher likelihood of a CUT than any further Fed hiking in 2020; NOW, with the spread again positive, the market has (very modestly) inflected towards the (smallish, but ‘there’) potential for another hike in 2020 on a re-gearing of U.S. economic bullishness.

Said another way, this is telling us something POWERFUL about the market’s accelerating +++ sentiment on U.S. economic growth trajectory—which is now viewed as “pushing-back” the ultimate “slow-down / recession” thesis timing.

Implicit there is the idea that if the inversion presaged the market sniffing out the end of the hiking cycle (and possible cuts ahead) and tipped an imminent steepening episode, a reversal of that inversion means the proverbial day of reckoning has been pushed back in light of recently ebullient econ. Here’s Charlie again:

This shift in sentiment could then too delay the potential sequencing of the move in the UST curve “from flatter to steeper,” which I have been projecting as a mid-2019 event and “THE” story for thematic macro regime shift as the ultimate “risk-off” signal indicating that the market is “sniffing” the end of the cycle…stay tuned.

Yes, “stay tuned.” We will, Charlie.

For good measure, McElligott leaves readers with a “thought experiment”, in the form of the following multi-pane stack that has a spoiler/decoder ring at the top for anyone who might need some assistance…


(Nomura, Bloomberg)



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