Guaranteed Recession in 2023

Federal Reserve Board Chair Jerome Powell testifies before the Senate Committee on Banking, Housing, and Urban Affairs on 'The Semiannual Monetary Policy Report to the Congress', at Capitol Hill in Washington on Tuesday, July 17, 2018. Jose Luis Magana/AP

From the central bank's latest rate hike to new developments in the ongoing bank crisis, a lot has happened in my absence.

Jerome Powell and co. indicated Wednesday that, financial turmoil or not, more rate hikes could be coming this year.

Markets, on the other hand, expect something else entirely. Futures are pricing in a minimal chance that the Fed's target rate will be the same or higher by 2024, according to CME's FedWatch tool.

This means the Fed and investors are on dramatically different pages (and only one can be correct).

And all the while, Jerome Powell's favorite bond-market indicator is quietly telling us that a recession is all but guaranteed this year.

1. Powell's preferred Treasury indicator is the spread between the yield on three-month Treasury bills and their expected yield in 18 months' time.

On Thursday, the spread inverted by a record 134 basis points. That's steeper than the previous record set in January 2001, two months before a recession struck, Bloomberg reports.

Talk of basis points, yield spreads, and other market jargon is obscuring the key message here: Markets think a recession is guaranteed in 2023.

Remember, an inverted yield curve suggests investors see more risk in the near term. It's a classic warning for a downturn.

Here's how Powell described the indicator last year:

"Frankly, there's good research by staff in the Federal Reserve system that really says to look at the short — the first 18 months — of the yield curve. That's really what has 100% of the explanatory power of the yield curve. It makes sense. Because if it's inverted, that means the Fed's going to cut, which means the economy is weak."  READ MORE...