The recession warning sign you’re about to start hearing a lot more about

2022 has been a pretty extraordinary year when it comes to volatility and uncertainty.


We’ve seen inflation ballooning, interest rates rising, the cost of living increasing, geopolitical concerns, share and property markets falling, and now the big “R” is looming: recession.


Investors are nervous about US Federal Reserve Chairman Jerome Powell’s upcoming speech on Friday, looking for further cues on how aggressively the Fed is likely to be with future interest rate hikes.

My tip is the Fed will raise interest rates by another 0.5% at its September meeting, which is a bit of an ease from the aggressive 0.75% over the last 3 months, and I expect our RBA will follow with a 0.25% increase in September. 


Of course, aggressive interest rate increases create a risk of higher mortgage stress, but also result in businesses and consumers cutting back on spending and potentially hurting corporate earnings and economic growth.


In addition though, there’s one red flag that has preceded every recession since 1956 – an inverted yield curve. But what on earth is that?

An inverted yield curve marks a point on a chart where short-term investments in US Treasury bonds pay more than long-term ones. When they flip, or invert, it’s widely regarded as a bad sign for the economy. 

It’s like getting a higher term deposit rate for 2 years than 10 years. And it’s exactly what’s happened in the US in the last few days, and it widened even further overnight.

One reason inversions happen is because investors are selling stocks and shifting their money to bonds. They’ve lost confidence in the economy and believe the meagre returns that bonds promise might be better than potential losses they could incur by holding stocks into a recession. So, demand for bonds goes up and the yields they pay go down.

This widespread loss of confidence explains why inverted yield curves have preceded every recession since 1956. The last inversion began in December 2005 and heralded the Great Recession, which officially began in December 2007. Then came the 2008 financial crisis. There was also an inversion before the tech bubble burst in 2001.

What does that mean for us here in Australia? We all know the saying, “when America sneezes, Australia catches a cold,” so watch this space.