New York, United States – Recent movements in interest rates and the dollar are reflecting concerns about the state of the economy. Following the release of the monthly job report on August 2, both the dollar index and interest rates experienced significant declines. Typically, this combination of falling long-end rates and a weaker dollar is interpreted by the market as a signal of potential economic slowdown and even a looming recession.

An interesting historical pattern emerges when looking at previous instances of declining rates and a weakened dollar. The one exception to recession following such indicators was in 1994. However, in most cases dating back to 1990, these trends have either foreshadowed or coincided with economic recessions.

The situation was further complicated by a steepening yield curve, especially pronounced after a disappointing jobs report in early August. The Bureau of Labor Statistics’ recent revelation of substantial revisions to non-farm payroll data for March 2024 added to concerns about weakening labor market conditions.

The steepening of the yield curve has often been a prelude to recessionary periods, often signaling a rise in unemployment rates. The latest data from the BLS seems to confirm not only a weakened labor market but also a potential earlier onset of this weakness than previously thought.

Beyond the yield curve dynamics, the market has also been observing falling bond yields, a declining dollar, and a steepening curve as potential indicators of a significant slowdown in the US economic growth trajectory. These trends are further accentuated by breakeven rates falling below 2% for the first time in over a year, signaling dampening inflation expectations and projecting slower nominal growth.

Technical analysis of the dollar’s performance suggests a potential further weakening, with key support levels approaching critical thresholds. Similarly, the 10-year rate nearing its lowest yield since December 2023 raises concerns about potential further declines, with support levels at risk of being breached.

The evolving relationship between the 2-year and 10-year rates also provides insight into growth concerns, with implications for the yield curve’s future shape. Widening credit spreads, although off historical lows, remain a critical indicator to watch for signs of economic distress, especially in relation to rising unemployment risk.

While early signs may be speculative, the mounting evidence points toward a market increasingly wary of decelerating economic growth. The market’s response to incoming data will likely dictate the trend’s direction, highlighting the ongoing tension between optimistic expectations and the reality of potentially slowing growth.