Stock markets around the world plunged amid fears of an interest hike by the US Federal Reserve. Will fiscal tightening cripple the world's economic recovery? Is a recession inevitable in 2022? Palki Sharma tells you.

Gravitas: Is a global recession coming?

The outbreak is expected to wipe out 6.7% of working hours across the world during the second quarter of 2020.That is the equivalent of 195 million full-time workers losing their jobs.

COVID-19 to wipe out millions of jobs

The global COVID-19 pandemic is now expected to take a far worse toll on foreign direct investments worldwide than feared just a few weeks ago, UN economists said Thursday.

A fresh report from the UN Conference on Trade, Investment and Development (UNCTAD) warned that the rapid spread of the coronavirus would cause a "dramatic drop" in global foreign direct investment, which is a measure of cross-border private sector investment.

The agency said it now believed that global FDI could be as much as 40 per cent lower than its projections in January when it had expected to see up to five per cent growth this year and next.&nbsp;

That compares to a forecast it issued just two weeks ago, in which it said that FDI would be up to 15 per cent lower than its January projections, in a worst-case scenario.

Efforts to halt the spread of the new coronavirus, which has killed nearly 22,000 people worldwide and infected more than 500,000, have wreaked havoc on international business and are rapidly pushing the world into a global recession.&nbsp;

"Projections of the economic impact of COVID-19 are becoming more serious by the day," Thursday's report said.

It said, "early expectations that the impact would be felt first and foremost through the ripple effects caused by production stoppages and supply chain disruptions in East Asia... and felt especially in economies that are closely integrated in global value chains are being overtaken by events."

"It is now evident that pandemic mitigation efforts and lockdowns around the world will have devastating effects on all economies, independent of their links to global supply networks," UNCTAD said.

The "consensus is that most if not all major economies will experience a deep recession", it added.&nbsp;

The global COVID-19 pandemic is now expected to take a far worse toll on foreign direct investments worldwide than feared just a few weeks ago, UN economists said Thursday.

The global COVID-19 pandemic is now expected to take a far worse toll on foreign direct investments worldwide than feared just a few weeks ago, UN economists said Thursday. A fresh report from the UN Conference on Trade, Investment and Development (UNCTAD) warned that the rapid spread of the coronavirus would cause a "dramatic drop" in global foreign direct investment, which is a measure of cross-border private sector investment. The agency said it now believed that global FDI could be as much as 40 per cent lower than its projections in January when it had expected to see up to five per cent growth this year and next. That compares to a forecast it issued just two weeks ago, in which it said that FDI would be up to 15 per cent lower than its January projections, in a worst-case scenario. Efforts to halt the spread of the new coronavirus, which has killed nearly 22,000 people worldwide and infected more than 500,000, have wreaked havoc on international business and are rapidly pushing the world into a global recession. "Projections of the economic impact of COVID-19 are becoming more serious by the day," Thursday's report said. It said, "early expectations that the impact would be felt first and foremost through the ripple effects caused by production stoppages and supply chain disruptions in East Asia... and felt especially in economies that are closely integrated in global value chains are being overtaken by events." "It is now evident that pandemic mitigation efforts and lockdowns around the world will have devastating effects on all economies, independent of their links to global supply networks," UNCTAD said. The "consensus is that most if not all major economies will experience a deep recession", it added.

Pandemic will cut global investment flows more than feared: UN

US government moved to clamp down the movement of citizens while announcing curfews in New Jersey state and San Francisco due to the rapid spread of coronavirus in the country.

Trump says pandemic not under control

Indian economy is facing a tough time but it seems we are at the end of it and dawn is approaching.&nbsp;

For the October-December quarter, GDP grew at 4.7 per cent in line with expectations of various estimates while the growth rate for the September quarter was revised up to 5.1 per cent.&nbsp;

At the same time, industrial production of 8 core sectors grew for the second month in January while growth in the core sectors for the month of December was also revised up from 1.3 to 2.1 per cent. Before that, it showed that there was a contraction for 4 months. Manufacturing PMI for the month of January also showed sharp uptick when it grew from 52.7 to 55.3. While other high-frequency indicators like passenger vehicle sales, rail freight traffic are giving mixed signals. Inflation has reached 7.59 per cent but that seemed to be due to perishable goods and is expected to come down.&nbsp;

The government has breached its fiscal deficit target, but looking at improvement in the core sector, it seems to be paying off.&nbsp;

Although a few green shoots are emerging which are trying hard to sustain, but before we dive into that, let’s take a look at what led to the slowdown.&nbsp;

Story of a current slowdown began with the delayed recognition of the twin balance sheet. It basically meant that companies were not profitable so they were unable to pay back their loans and since banks did not receive the previous loans they were unable to lend more money.

Due to this investment started deaccelerating at a time when the Indian economy was growing rapidly and a high rate of investment was required to maintain it. At the same time, the central bank increased the interest rates, following which inflation fell quite quickly.

Now high-interest rates, coupled with low inflation, led to the high real rate of interest which further dented the investments. This, in turn, impacted the job and wage growth rate.&nbsp;

All this happened in the labour-intensive sector, so a large number of people were affected which translated into a lower level of consumption, while rural consumption also fell due to the problem of uneven monsoon.&nbsp;

Since businesses were already under pressure, this fall in consumption had a multiplier effect which led to a bigger fall in investments and more downsizing by firms. For example, in the FMCG sector - the sales growth in rural areas is generally more than urban counterpart but last year it fell to almost half.&nbsp;

Due to a tight balance sheet of banks, NBFC sector (Non-Banking Finance Company) emerged into prominence and its lending increased, specifically for high ticket items like cars and homes. Also, NBFCs give a huge amount of loan to the unorganised sector. But shadow banks also took a hit after ILFS fiasco as lenders’ trust on NBFCs dented.&nbsp;

Now the global economy was also facing headwinds due to geopolitical tensions in the form of a trade war and Brexit but in most of the developed countries, the labour market was quite strong and that supported consumption. Since India's consumption also took a hit, we saw a sharp fall in the Indian growth rate as compared to the rest of the world.&nbsp;

Not to forget, the fall in investments affected the competitiveness and productivity of Indian firms at a global level (potentially), and this along with global slowdown dented the exports.&nbsp;

Government is in full fledge mode to revive growth, it has reduced corporate tax, changed personal income tax structure, set up infrastructure fund of Rs 105 lakh crore, while also coming up with various sector-specific measures. Although the government's earnings are facing stress due to low tax collection and delay in the divestment process, but right now it is more concerned about growth.

So if the economy is revived, even though the fiscal deficit target is breached, the long term fiscal consolidation target will also be achieved.

Reserve Bank of India (RBI) is also showing up its ammunition in the fight against slowdown, as it reduced the repo rate by 135 basis point.&nbsp;

And when inflation constrained it from reducing the rate further, the RBI came up with other measures like operation twist (buying long term bonds and selling short term bonds to reduce long term interest rates), easing CRR norms on incremental loans to boost lending for MSME, automobile and residential sector.&nbsp;

Furthermore, the central bank conducted long term repo operation, so banks can get money at cheaper rates and also linked more loans to external benchmarks like repo rates.&nbsp;

Although RBI reduced rates by 135 basis points, banks have not completely transmitted them because of which their profitability has improved, also the previous NPAs are being resolved.

And quality shadow banks (High-grade NBFCs) are also emerging stronger as their borrowing cost has reduced.&nbsp;

Still, there are few headwinds like telecom sector and now the coronavirus is a googly which took everyone by surprise.&nbsp;

Coronavirus has disrupted the supply chain and has impacted both the manufacturing and the service sector. The virus is spreading across the world and it can become a pandemic, which can cause a global recession. On the global front, fear of recession is quite high as indicated by a sharp fall in financial markets.&nbsp;

The current slowdown is basically a result of the policy - prevention is better than cure as business activities are being shut off to contain virus outbreak while previously it was more like a cure after the damage.

Economic fundamentals, like job market and consumption, are still strong so if the virus is contained soon, then sharp recovery can be expected in sentiment.&nbsp;

In the current scenario, the high-frequency indicator will have a favourable base effect which might give a further boost to the sentiment.&nbsp;

Also, an incident like this brings countries closer and to revive the global economy from something like this, a collaborated action can be required which would lead to countries shifting from protectionism to a more open economy.&nbsp;

This would boost exports growth in India while attracting foreign money in the form of both FPI and FDI.&nbsp; 
 
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)&nbsp;

Indian economy is facing a tough time but it seems we are at the end of it and dawn is approaching. For the October-December quarter, GDP grew at 4.7 per cent in line with expectations of various estimates while the growth rate for the September quarter was revised up to 5.

Indian economy is facing a tough time but it seems we are at the end of it and dawn is approaching. For the October-December quarter, GDP grew at 4.7 per cent in line with expectations of various estimates while the growth rate for the September quarter was revised up to 5.1 per cent. At the same time, industrial production of 8 core sectors grew for the second month in January while growth in the core sectors for the month of December was also revised up from 1.3 to 2.1 per cent. Before that, it showed that there was a contraction for 4 months. Manufacturing PMI for the month of January also showed sharp uptick when it grew from 52.7 to 55.3. While other high-frequency indicators like passenger vehicle sales, rail freight traffic are giving mixed signals. Inflation has reached 7.59 per cent but that seemed to be due to perishable goods and is expected to come down. The government has breached its fiscal deficit target, but looking at improvement in the core sector, it seems to be paying off. Although a few green shoots are emerging which are trying hard to sustain, but before we dive into that, let’s take a look at what led to the slowdown. Story of a current slowdown began with the delayed recognition of the twin balance sheet. It basically meant that companies were not profitable so they were unable to pay back their loans and since banks did not receive the previous loans they were unable to lend more money. Due to this investment started deaccelerating at a time when the Indian economy was growing rapidly and a high rate of investment was required to maintain it. At the same time, the central bank increased the interest rates, following which inflation fell quite quickly. Now high-interest rates, coupled with low inflation, led to the high real rate of interest which further dented the investments. This, in turn, impacted the job and wage growth rate. All this happened in the labour-intensive sector, so a large number of people were affected which translated into a lower level of consumption, while rural consumption also fell due to the problem of uneven monsoon. Since businesses were already under pressure, this fall in consumption had a multiplier effect which led to a bigger fall in investments and more downsizing by firms. For example, in the FMCG sector - the sales growth in rural areas is generally more than urban counterpart but last year it fell to almost half. Due to a tight balance sheet of banks, NBFC sector (Non-Banking Finance Company) emerged into prominence and its lending increased, specifically for high ticket items like cars and homes. Also, NBFCs give a huge amount of loan to the unorganised sector. But shadow banks also took a hit after ILFS fiasco as lenders’ trust on NBFCs dented. Now the global economy was also facing headwinds due to geopolitical tensions in the form of a trade war and Brexit but in most of the developed countries, the labour market was quite strong and that supported consumption. Since India's consumption also took a hit, we saw a sharp fall in the Indian growth rate as compared to the rest of the world. Not to forget, the fall in investments affected the competitiveness and productivity of Indian firms at a global level (potentially), and this along with global slowdown dented the exports. Government is in full fledge mode to revive growth, it has reduced corporate tax, changed personal income tax structure, set up infrastructure fund of Rs 105 lakh crore, while also coming up with various sector-specific measures. Although the government's earnings are facing stress due to low tax collection and delay in the divestment process, but right now it is more concerned about growth. So if the economy is revived, even though the fiscal deficit target is breached, the long term fiscal consolidation target will also be achieved. Reserve Bank of India (RBI) is also showing up its ammunition in the fight against slowdown, as it reduced the repo rate by 135 basis point. And when inflation constrained it from reducing the rate further, the RBI came up with other measures like operation twist (buying long term bonds and selling short term bonds to reduce long term interest rates), easing CRR norms on incremental loans to boost lending for MSME, automobile and residential sector. Furthermore, the central bank conducted long term repo operation, so banks can get money at cheaper rates and also linked more loans to external benchmarks like repo rates. Although RBI reduced rates by 135 basis points, banks have not completely transmitted them because of which their profitability has improved, also the previous NPAs are being resolved. And quality shadow banks (High-grade NBFCs) are also emerging stronger as their borrowing cost has reduced. Still, there are few headwinds like telecom sector and now the coronavirus is a googly which took everyone by surprise. Coronavirus has disrupted the supply chain and has impacted both the manufacturing and the service sector. The virus is spreading across the world and it can become a pandemic, which can cause a global recession. On the global front, fear of recession is quite high as indicated by a sharp fall in financial markets. The current slowdown is basically a result of the policy - prevention is better than cure as business activities are being shut off to contain virus outbreak while previously it was more like a cure after the damage. Economic fundamentals, like job market and consumption, are still strong so if the virus is contained soon, then sharp recovery can be expected in sentiment. In the current scenario, the high-frequency indicator will have a favourable base effect which might give a further boost to the sentiment. Also, an incident like this brings countries closer and to revive the global economy from something like this, a collaborated action can be required which would lead to countries shifting from protectionism to a more open economy. This would boost exports growth in India while attracting foreign money in the form of both FPI and FDI. (Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)

How this economic slowdown is different from the previous ones

European stocks fell on Wednesday as <a href="https://www.wionews.com/business-economy/germanys-metro-says-66-billion-bid-undervalues-company-229824">Germany's economy </a>went into reverse, reviving fears of global recession and tempering a rally for equities after Washington delayed tariffs on some Chinese imports.

Europe's biggest economy shrank 0.1 per cent in the second quarter as the trade war and weak demand dragged on German manufacturers.

&nbsp;The eurozone as a whole reported gross domestic product grew just 0.2 per cent in the same quarter.

<a href="https://www.wionews.com/business-economy?page=12">The Euro STOXX 600 fell 0.4 per cent</a>. Markets in London, Frankfurt, and Paris lost from 0.2per cent to 0.6per cent.&nbsp;

Wall Street futures gauges were also lower.

Bond markets were also flashing warning signals of recession.&nbsp;

The gap between US two-year and 10-year Treasury yields, a closely watched metric for signs of a slowdown, fell to less than a basis point after shrinking on Tuesday to its narrowest since June 2007.

The German figures, along with data showing the slowest growth for Chinese industrial output in 17 years stoking recession worries, knocked the wind out the sails for stocks.

Equity investors on Wall Street and Asia had cheered earlier when US&nbsp;President Donald Trump pushed back a Sept. 1 deadline for new tariffs on remaining Chinese imports.

The S&amp;P 500, which had fallen 1per cent on Monday, rose 1.5per cent overnight, sending Asian stocks outside Japan up 0.6per cent.&nbsp;

Benchmarks in Shanghai, Hong Kong and Tokyo all mirrored the surge in US stocks.

But the momentum ebbed in Europe, as optimism faded that Trump's move meant tensions were easing and Germany's slowdown showed the damage already done by the trade war.

"The trade war and the dispute between US and China have already had an impact, especially when you look at countries most sensitive to global trade like Germany and even Italy," said Christophe Barraud, chief economist and strategist at Market Securities in Paris.

The MSCI world equity index, which tracks shares in 47 countries, was flat.

In another sign the trade dispute is dragging on economic growth, China's industrial output slowed more than expected in July.&nbsp;

Its 4.8per cent growth was the lowest in 17 years.

The Japanese yen, considered a safe haven, gained 0.3per cent to 106.42 per dollar as the Chinese data signalled that any resolution to the trade war was a long way off.

Mirroring that view, the offshore Chinese yuan fell 0.4per cent against the dollar to 7.0337, erasing gains made the day before and remaining weaker than the 7 to the dollar it reached last week.

In commodity markets, oil prices fell after the Chinese data from China and a rise in US crude inventories, erasing some of the gains made after Trump's tariff delay.

Brent crude was down 54 cents, or 0.9per cent, at $60.76 a barrel at 0744 GMT, after rising 4.7per cent on Tuesday, its biggest percentage gain since December.

European stocks fell on Wednesday as Germany's economy went into reverse, reviving fears of global recession and tempering a rally for equities after Washington delayed tariffs on some Chinese imports.

European stocks fell on Wednesday as Germany's economy went into reverse, reviving fears of global recession and tempering a rally for equities after Washington delayed tariffs on some Chinese imports. Europe's biggest economy shrank 0.1 per cent in the second quarter as the trade war and weak demand dragged on German manufacturers. The eurozone as a whole reported gross domestic product grew just 0.2 per cent in the same quarter. The Euro STOXX 600 fell 0.4 per cent. Markets in London, Frankfurt, and Paris lost from 0.2per cent to 0.6per cent. Wall Street futures gauges were also lower. Bond markets were also flashing warning signals of recession. The gap between US two-year and 10-year Treasury yields, a closely watched metric for signs of a slowdown, fell to less than a basis point after shrinking on Tuesday to its narrowest since June 2007. The German figures, along with data showing the slowest growth for Chinese industrial output in 17 years stoking recession worries, knocked the wind out the sails for stocks. Equity investors on Wall Street and Asia had cheered earlier when US President Donald Trump pushed back a Sept. 1 deadline for new tariffs on remaining Chinese imports. The S&P 500, which had fallen 1per cent on Monday, rose 1.5per cent overnight, sending Asian stocks outside Japan up 0.6per cent. Benchmarks in Shanghai, Hong Kong and Tokyo all mirrored the surge in US stocks. But the momentum ebbed in Europe, as optimism faded that Trump's move meant tensions were easing and Germany's slowdown showed the damage already done by the trade war. "The trade war and the dispute between US and China have already had an impact, especially when you look at countries most sensitive to global trade like Germany and even Italy," said Christophe Barraud, chief economist and strategist at Market Securities in Paris. The MSCI world equity index, which tracks shares in 47 countries, was flat. In another sign the trade dispute is dragging on economic growth, China's industrial output slowed more than expected in July. Its 4.8per cent growth was the lowest in 17 years. The Japanese yen, considered a safe haven, gained 0.3per cent to 106.42 per dollar as the Chinese data signalled that any resolution to the trade war was a long way off. Mirroring that view, the offshore Chinese yuan fell 0.4per cent against the dollar to 7.0337, erasing gains made the day before and remaining weaker than the 7 to the dollar it reached last week. In commodity markets, oil prices fell after the Chinese data from China and a rise in US crude inventories, erasing some of the gains made after Trump's tariff delay. Brent crude was down 54 cents, or 0.9per cent, at $60.76 a barrel at 0744 GMT, after rising 4.7per cent on Tuesday, its biggest percentage gain since December.

Stocks take fright as recession warnings grow

Domestic equity market ended nearly a per cent lower on Monday on growing fears about a US recession and global economic slowdown, with banking and realty counters taking the biggest hit.

The BSE Sensex tumbled 355.70 points to end at 37,808.91 while the wider NSE Nifty plunged 102.65 points to 11,354.25.

The Sensex has now lost over 575 points in two sessions.

<a href="https://www.wionews.com/business-economy/naresh-goyal-quits-jet-airways-205510">Jet Airways rallied</a> nearly 15.5 per cent after it announced Chairman Naresh Goyal and his wife Anita Goyal have stepped down from the board of the cash-strapped airline.

The stock jumped 12.69 per cent to close at Rs 254.50 on the BSE. During the day, it rose sharply by 17.77 per cent to Rs 266.

On the National Stock Exchange (NSE), shares zoomed 15.46 per cent to close at Rs 261 apiece.

On the traded volume front, 33.60 lakh shares were traded on the BSE and over 4 crore shares on the NSE during the day.

Investor sentiment dampened after weaker-than-expected economic data from the US and Europe last week stoked fears of a global slowdown. The trade worries between the US and China too added to the worries, brokers said.

Besides, investors preferred to keep their portfolios at a low ebb ahead of fiscal 2018-19 coming to an end, they added.

Worries over the health of the global economy heightened last week after cautious remarks by the US Federal Reserve sent 10-year treasury yields to the lowest since early 2018.

Most other Asian markets too ended sharply down, while European shares were trading lower in their opening sessions.

The 30-share Sensex, after opening lower at 38,016.76, stayed in the negative territory through the session and slipped below the 38,000-mark to touch a low of 37,667.40 on mounting selling pressure in sync with the global sell-off.

However, fag-end buying at lower levels trimmed losses to some extent. The benchmark finally ended at 37,808.91 -- down by 355.70 points or 0.93 per cent.

The 50-issue NSE Nifty too cracked below the 11,400-mark and hit a low of 11,311.60, before finishing 102.65 points, or 0.90 per cent down at 11,354.25.

Meanwhile, domestic institutional investors (DIIs) sold shares worth Rs 657.37 crore, while foreign funds remained net buyers, pumping in Rs 1,374.57 crore in Friday's trade, provisional data showed.

(With inputs from PTI)

Domestic equity market ended nearly a per cent lower on Monday on growing fears about a US recession and global economic slowdown, with banking and realty counters taking the biggest hit.

Domestic equity market ended nearly a per cent lower on Monday on growing fears about a US recession and global economic slowdown, with banking and realty counters taking the biggest hit. The BSE Sensex tumbled 355.70 points to end at 37,808.91 while the wider NSE Nifty plunged 102.65 points to 11,354.25. The Sensex has now lost over 575 points in two sessions. Jet Airways rallied nearly 15.5 per cent after it announced Chairman Naresh Goyal and his wife Anita Goyal have stepped down from the board of the cash-strapped airline. The stock jumped 12.69 per cent to close at Rs 254.50 on the BSE. During the day, it rose sharply by 17.77 per cent to Rs 266. On the National Stock Exchange (NSE), shares zoomed 15.46 per cent to close at Rs 261 apiece. On the traded volume front, 33.60 lakh shares were traded on the BSE and over 4 crore shares on the NSE during the day. Investor sentiment dampened after weaker-than-expected economic data from the US and Europe last week stoked fears of a global slowdown. The trade worries between the US and China too added to the worries, brokers said. Besides, investors preferred to keep their portfolios at a low ebb ahead of fiscal 2018-19 coming to an end, they added. Worries over the health of the global economy heightened last week after cautious remarks by the US Federal Reserve sent 10-year treasury yields to the lowest since early 2018. Most other Asian markets too ended sharply down, while European shares were trading lower in their opening sessions. The 30-share Sensex, after opening lower at 38,016.76, stayed in the negative territory through the session and slipped below the 38,000-mark to touch a low of 37,667.40 on mounting selling pressure in sync with the global sell-off. However, fag-end buying at lower levels trimmed losses to some extent. The benchmark finally ended at 37,808.91 -- down by 355.70 points or 0.93 per cent. The 50-issue NSE Nifty too cracked below the 11,400-mark and hit a low of 11,311.60, before finishing 102.65 points, or 0.90 per cent down at 11,354.25. Meanwhile, domestic institutional investors (DIIs) sold shares worth Rs 657.37 crore, while foreign funds remained net buyers, pumping in Rs 1,374.57 crore in Friday's trade, provisional data showed. (With inputs from PTI)

Sensex tanks 356 points on global recession fears; Jet rallies 15% as Goyal steps down

Part of the US Treasury yield curve "inverted" this week, setting off debate over whether it is delivering a classic signal of oncoming recession or it has just developed a short-term kink that can be explained away by technical reasons.

Whatever the reason, investors and economists ignore this message from the bond market at their peril: yield curve inversions - when shorter-dated securities yield more than longer maturities - have preceded every US recession in recent memory by anywhere from 15 months to around two years.

"The yield curve has sent a chill down investors' spines in regard to the future outlook of the US economy," said Chad Morganlander, senior portfolio manager at Washington Crossing Advisors in New Jersey. "It's the what-if scenario."

To be sure, this week's inversion has been limited so far to the front-end of the yield curve rather than more closely studied recession harbingers such as the gap between 2-year and 10-year note yields. In the current instance, yields on five-year notes have dropped below those on both two-year and three-year securities.

Still, in December 2005, for instance, a comparable inversion at the front of the curve was followed shortly afterward by an inversion between 2- and 10-year yields. The Great Recession began in December 2007.

That pattern was also evident in late 1988 in advance of the 1990 recession. Ahead of the 2001 recession, the entire curve dropped into inversion in sync in February 2000.

TECHNICAL GLITCH OR FUNDAMENTAL WARNING?

In the current instance, investors and economists are debating whether this warns of economic weakness ahead or if it reflects other factors, such as a recent reversal of large speculative bets on declining bond prices and the Federal Reserve's large holdings of Treasuries.

A central focus is whether it means the market is second guessing the Fed, which has been raising interest rates for three years and is expected to lift them further, including at their next meeting in two weeks.

Jeffrey Gundlach, chief executive officer of DoubleLine Capital and a closely watched bond investor, comes down on the side of it being a fundamental signal. It reflects "total bond market disbelief in the Federal Reserve's prior plans to raise rates through 2019," he told Reuters.

At the same time, this week's move does coincide with an ongoing positioning shift in the Treasury market.

Hedge funds and other speculators had amassed a record level of bets on declines in Treasury prices through the futures market, with the heaviest bets lodged against 5-year maturities. But they have slashed those by more than half in the last few weeks, and that may have contributed to the out-sized rally in 5-year note prices in particular. Bond prices and yields move in opposite directions.

"A lot of it is momentum," said John Canavan, market strategist with Stone &amp; McCarthy Research Associates in New York. "I do think it's overdone with short-covering and unwinding of money-losing positions."

Another current factor that was absent in previous inversion episodes is the Fed's $3.92 trillion stockpile of bonds accumulated to soften the effects of the 2008 financial crisis. While it has been shrinking its holdings for more than a year, its bond portfolio remains the world's largest and is seen as a force in suppressing longer-dated yields.

RECORD ECONOMIC EXPANSION

Those potential explanations aside, the US economy is in the middle of its second-longest expansion on record, and economists and investors are mindful that a downturn is inevitable.

Some business sectors like auto and housing are flagging due partly to rising interest rates, while debt-laden companies have raised concerns whether they could keep up with their debt payments as borrowing costs are rising.

Fed officials have cited these developments that bear watching, but several of them have repeatedly cautioned about the inversion of yield curve as the most reliable indicator that a recession is on the horizon.

Some traders said the dramatic curve flattening may be overdone and may revert if the government's November payrolls report out on Friday were to show solid jobs and wage growth.

While the risk of the entire yield curve inverting grows in anticipation of slower domestic growth, the economy appears on sure footing due to a solid job market and mild inflation.

Last year's massive federal tax cut has bolstered business confidence, but trade tension between Washington and major US trade partners looms as a possible economic drag, analysts said.

And, even if the latest kink in the yield curve is indeed the first signal of a downturn as many suspect, it does not indicate when it will actually begin nor how severe it will be.

"It’s a sloppy predictor because at some point after yield curve inversion you could get a recession that could be one year, two year, three years," said Nicholas Colas, co-founder at DataTrek Research in New York. "And as far as what it means to markets, you could still have another very solid year after inversion."

Part of the US Treasury yield curve "inverted" this week, setting off debate over whether it is delivering a classic signal of oncoming recession or it has just developed a short-term kink that can be explained away by technical reasons.

Part of the US Treasury yield curve "inverted" this week, setting off debate over whether it is delivering a classic signal of oncoming recession or it has just developed a short-term kink that can be explained away by technical reasons. Whatever the reason, investors and economists ignore this message from the bond market at their peril: yield curve inversions - when shorter-dated securities yield more than longer maturities - have preceded every US recession in recent memory by anywhere from 15 months to around two years. "The yield curve has sent a chill down investors' spines in regard to the future outlook of the US economy," said Chad Morganlander, senior portfolio manager at Washington Crossing Advisors in New Jersey. "It's the what-if scenario." To be sure, this week's inversion has been limited so far to the front-end of the yield curve rather than more closely studied recession harbingers such as the gap between 2-year and 10-year note yields. In the current instance, yields on five-year notes have dropped below those on both two-year and three-year securities. Still, in December 2005, for instance, a comparable inversion at the front of the curve was followed shortly afterward by an inversion between 2- and 10-year yields. The Great Recession began in December 2007. That pattern was also evident in late 1988 in advance of the 1990 recession. Ahead of the 2001 recession, the entire curve dropped into inversion in sync in February 2000. TECHNICAL GLITCH OR FUNDAMENTAL WARNING? In the current instance, investors and economists are debating whether this warns of economic weakness ahead or if it reflects other factors, such as a recent reversal of large speculative bets on declining bond prices and the Federal Reserve's large holdings of Treasuries. A central focus is whether it means the market is second guessing the Fed, which has been raising interest rates for three years and is expected to lift them further, including at their next meeting in two weeks. Jeffrey Gundlach, chief executive officer of DoubleLine Capital and a closely watched bond investor, comes down on the side of it being a fundamental signal. It reflects "total bond market disbelief in the Federal Reserve's prior plans to raise rates through 2019," he told Reuters. At the same time, this week's move does coincide with an ongoing positioning shift in the Treasury market. Hedge funds and other speculators had amassed a record level of bets on declines in Treasury prices through the futures market, with the heaviest bets lodged against 5-year maturities. But they have slashed those by more than half in the last few weeks, and that may have contributed to the out-sized rally in 5-year note prices in particular. Bond prices and yields move in opposite directions. "A lot of it is momentum," said John Canavan, market strategist with Stone & McCarthy Research Associates in New York. "I do think it's overdone with short-covering and unwinding of money-losing positions." Another current factor that was absent in previous inversion episodes is the Fed's $3.92 trillion stockpile of bonds accumulated to soften the effects of the 2008 financial crisis. While it has been shrinking its holdings for more than a year, its bond portfolio remains the world's largest and is seen as a force in suppressing longer-dated yields. RECORD ECONOMIC EXPANSION Those potential explanations aside, the US economy is in the middle of its second-longest expansion on record, and economists and investors are mindful that a downturn is inevitable. Some business sectors like auto and housing are flagging due partly to rising interest rates, while debt-laden companies have raised concerns whether they could keep up with their debt payments as borrowing costs are rising. Fed officials have cited these developments that bear watching, but several of them have repeatedly cautioned about the inversion of yield curve as the most reliable indicator that a recession is on the horizon. Some traders said the dramatic curve flattening may be overdone and may revert if the government's November payrolls report out on Friday were to show solid jobs and wage growth. While the risk of the entire yield curve inverting grows in anticipation of slower domestic growth, the economy appears on sure footing due to a solid job market and mild inflation. Last year's massive federal tax cut has bolstered business confidence, but trade tension between Washington and major US trade partners looms as a possible economic drag, analysts said. And, even if the latest kink in the yield curve is indeed the first signal of a downturn as many suspect, it does not indicate when it will actually begin nor how severe it will be. "It’s a sloppy predictor because at some point after yield curve inversion you could get a recession that could be one year, two year, three years," said Nicholas Colas, co-founder at DataTrek Research in New York. "And as far as what it means to markets, you could still have another very solid year after inversion."

Is recession setting in? Analysing the inverted US yield curve

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