Market Pulse: September 16, 2024

Two charts and two graphics.

As you can also see on the chart the inversion of the 2/10 spread has for at least the past four decades signaled that a recession is on the way. Although this spread looks to be predictive, it is not considered by some experts to be the best signal of trouble up ahead amongst the various Treasury spreads. While it can certainly be said that each of the Treasury spreads are usually highly correlated, you have to look to the 3-Month/10 Year yield spread to find the best of breed.

There is a notable difference in the at the present time between the 2/10s and the 3m/10s. While the 2 Year yield has fallen back under the 10 Year yield, the 3-month Treasury Bill remains premium to the 10s by about 140 basis points. Additionally, this curve did not invert until about four months after the 2/10 did, in late October 2022, the inversion got much steeper, at 189 basis points, and there was no false flag, such as 2/10 short lived inversion of March 2022. These are among the reasons the 3m/10Year is considered the spread to follow. At least that’s the opinion presented in one of the definitive articles on the matter:

Since trading at its weakest level in several decades in early July, the yen has strengthened sharply. The Dollar/Yen cross was up at 161.95 at its peak, but it traded down below 142.00 by early August. There was a lot of chatter accompanying the move that it was the result of Yen-Carry-Trade liquidation; a lot of markets moved as though that was the case. There was then some consolidation in weeks that followed, but the move lower in the yen resumed and in recent days it is testing a key technical level; the 0.618 retracement of the range bounded by the low of January 2023 and the high price set in July, is at 140.49, indicated by the blue line on the chart above. The timing of this test of the technicals is a bit ominous considering that both the Fed and the Bank of Japan have policy meetings this week. There is a chance the Fed initiates their easing cycle with a fifty-basis point cut; the markets are in an ongoing debate between that more aggressive move and the previous expectation that a twenty-five-basis point reduction is the right call. In any case the first move by the Fed will not be the last. The BoJ on the other hand is not forecast to move its Target Rate this week, currently at 0.25%, but the suggestion is that higher rates are in their future. A wellness check of the Dollar/Yen is probably an important thing to do in the moments after the central bank announcements. While it is certain that some yen funded carry trades were liquidate this summer, there could be another round of that liquidation if the 0.618 retracement doesn’t hold.

The day before the Fed policy announcement we get the first look at September Retail Sales. There have been mixed messages about the state of the consumer; we shall see if this report clears or clouds the picture. The July result was surprisingly strong, +1.0% month on month was much better than the forecast for +0.4%. But, overall, this series on sales has been less than robust. On a year-on-year basis Retail Sales are at an interesting level; whether it holds the line might matter.

According to the Financial Times:

China is to raise the retirement age for the first time since 1978, as the world’s second largest economy faces up to a sharply ageing population that will leave it short of workers. The country will gradually extend the retirement age for all men from 60 to 63, for women in white-collar jobs from 55 to 58, and for women in blue-collar work from 50 to 55, state-owned news agency Xinhua reported on Friday. The measures were approved by the standing committee of China’s rubber-stamp parliament on Friday. They will take effect in January and be phased in over 15 years in line with the principle of “small-step adjustments”, Xinhua said. Analysts say China needs to act because its low retirement age and declining birth rate are driving up the old-age dependency ratio — the number of retirees to the working-age population. The country’s population declined for a second consecutive year in 2023, to 1.4bn, as deaths outstripped births by 2mn.

According to the latest UN report on China’s population: China’s population began shrinking in 2022, and the latest United Nations report indicates that it could slip to 1.3 billion in 2050 and then plummet to only 770 million in 2100…

An important factor is the dependency ratio, which compares the “dependent” population of youth (zero to 14 years of age) and older adults (aged 65 and older) to the working population between the ages of 15 and 64. In 1980 China’s ratio was 68 dependents for every 100 people of working age. In 2020 it was a more favorable 44 per 100. The coming bulge of older adults, however, will push the ratio up to a potentially socially destabilizing level—as much as 89 per 100 around 2085, according to our calculation.

More from the UN: China’s population decline raises fundamental issues about childbearing, dependency ratios and “optimum” population size. Demographers have a way of describing a country’s population in a graphic: the population pyramid. It shows the number of male and female members of a population at a point in time, typically in five-year age groups, which is helpful for understanding societal issues.

China’s population in 1980 was around 980 million. It was distributed in the classic pyramid shape of a growing population: wider at the younger ages and narrower at the older ages. (See the graphic above.) One quirk was that there was a slightly smaller 20–24 age group than the 25–29 age group because of disruption caused by the Cultural Revolution, which began in 1966. The 15–19 and 10–14 age groups reflected a rebound. But the beginning of the 40-year trend toward smaller age groups could be seen in the five-to-nine and zero-to-four age groups. China’s one-child policy reinforced this trend, but other factors contributed, such as rapidly rising incomes, education, urbanization and better access to birth control.