Yield curve inversion signals economic weakness ahead of us

In macro-finance, it is well known that an inverted yield curve is signalling a recession or at the very minimum, it is indicating that the economy is operating in a late cycle. For example, the 2-year/10-year Treasury slope has inverted in advance of 7 of the past 8 recession periods. However, it is a less useful indicator in predicting the lead time when a recession emerges. On average, the slope inverted around 16 months before the start of the next recession. The inversion occurred in all but one instance (1973-75) before the peak in the S&P 500.

What does the inversion mean for the current cycle? At the minimum, we have to acknowledge that the economic recovery has entered its late stage and that current inflation pressure will hit profit margins. Should a vicious price-wage spiral be avoided, the lead time for the next recession will certainly be expanded.

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