Category: Countries & Regions

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Rising recession risk threatens bond market

Summary

  • Trade talks with China have stalled
  • President Trump announces steel and aluminum tariffs will increase from 25% to 50%
  • Input costs for US manufacturers are expected to soar
  • Spending is expected to slow after the introduction of tariffs in April
  • The economic outlook is clouded with uncertainty, and the risk of a recession is rising

President Trump accused China of “totally violating its agreement” with the United States last week. (Reuters)

The Geneva agreement concluded between Treasury Secretary Bessent and his Chinese counterpart called for a 90-day pause in increased tariffs and for China to lift restrictions on exports of critical materials such as rare earths needed for semiconductor, electronics, and defense applications.

According to a US trade representative, the Chinese are moving slowly on granting export licenses for critical materials. The automobile industry is already warning that shortages of rare earth magnets could halt production in a matter of weeks.

The Chinese slow-walking of export licenses appears to be retaliation for the US last week imposing license requirements, and revoking some licenses, for exports of design software and chemicals for semiconductors, butane and ethane, machine tools, and aviation equipment.

In another blow to the auto industry, President Trump announced that he will increase tariffs on steel and aluminum imports from 25% to 50%. Steelmakers are expected to benefit from higher domestic prices, boosting output, but automobile manufacturing, heavy engineering, and construction industries will likely bear the costs.

Steel exports from Canada and Mexico will be most affected, but South Korea, Germany, and Brazil are also expected to suffer. The EU has threatened retaliatory measures if the issue cannot be resolved.

Aluminum imports are likely to continue despite the increased tariffs. Bauxite and electricity are the two primary input costs of smelters, and domestic US smelters will struggle to match the low-cost hydroelectric power of global competitors.

Financial Markets

The S&P 500 is testing the band of resistance at 6000, but short weekly candles indicate hesitancy.

S&P 500

Strong liquidity supports financial markets, with the Chicago Fed National Financial Conditions Index falling to -0.606, signaling easy monetary conditions.

Chicago Fed National Financial Conditions Index

10-year Treasury yields are testing support between 4.4% and 4.5%, but the weak dollar warns of capital outflows that are expected to send long-term yields higher.

10-Year Treasury Yield

JPMorgan CEO Jamie Dimon says, “You are going to see a crack in the bond market. It is going to happen…. I’m telling you it’s going to happen….”

Economy

Former Fed economist Dr Lacy Hunt warns that the US economy is slowing, with a higher than 50% probability of recession. He warns that the economy is far weaker than generally understood, and what markets are not considering is that spending brought forward to front-run tariffs is likely to cause a sharp drop in spending in the next few months.

A recession would also cause the fiscal deficit to increase sharply, by at least another 2.0% of GDP, adding further stress on the bond market.

The ISM manufacturing PMI declined to 48.5% in May, indicating a long-term contraction.

ISM Manufacturing PMI

Manufacturing inventories surged in March as manufacturers brought forward purchases to get ahead of April’s tariff increases.

ISM Manufacturing Inventories

Imports also surged in the first quarter, followed by a steep plunge in May.

ISM Manufacturing Imports

Exports are contracting at a similar rate.

ISM Manufacturing Exports

Prices is the only sub-index that has surged, warning of steeply rising input costs.

ISM Manufacturing Prices

Crude Oil

OPEC+ decided to increase production targets by 411.000 barrels per day in July, which is equal to the increases in May and June.

However, in a sign of shrinking global trade, China’s seaborne imports declined by more than a million barrels per day in May. Kpler estimates imports at 9.43 mbpd compared to 10.46 mbpd in April and 10.45 mbpd in March. (Reuters)

Brent crude is likely to re-test support at $60 per barrel, and breach would offer a target of $50.

Brent Crude

Dollar & Gold

Capital outflows are weakening the dollar. The US Dollar Index has broken support at 100, and follow-through below 98 would confirm another decline with a target of 90.

Dollar Index

Gold rallied to test the band of resistance at $3,400 per ounce. A breakout above $3,500 would strengthen our target of $4,000 by the end of 2025.

Spot Gold

Conclusion

Due to high levels of uncertainty, consumers and corporations are expected to defer capital expenditures in the months ahead. The drop in spending is likely to be accelerated by the build-up in inventories and the bringing forward of expenditures to get ahead of tariff increases in April.

Contracting imports and exports in the manufacturing sector warn that the economy will slow. Falling crude oil imports in China paint a similar outlook, suggesting a global recession.

A recession would increase the deficit and further stress the bond market, which is already concerned about spiraling debt levels.

A falling dollar and rising gold price warn of capital outflows from US financial markets. JPMorgan CEO Jamie Dimon tells us to prepare for a coming crack in the bond market. That would mean higher long-term yields and sharply lower stock prices, likely boosting demand for gold even higher.

Acknowledgments

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ASX Market Leading Indicators

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.

Bull/Bear Market

The ASX Bull-Bear Market indicator remains at 54%, signaling a mild bear market.

Three of the six indicators from Australia and China (our largest trading partner) signal risk-off. These have a combined weighting of 60% in the ASX Bull-Bear Index. The US Bull-Bear Index, also unchanged, makes up the remaining 40%.

ASX Bull-Bear Market Indicator

The ASX 200 Financials index ($XFJ) threatens to break out above 9260 on the weekly chart. A higher close would signal a new uptrend, reversing the bear signal from March 7, 2025.

ASX 200 Financials

Also, China’s NBS manufacturing PMI improved to 49.5 in May. A decrease below 49 would have triggered a recession signal.

China: NBS Manufacturing PMI

However, Australian private dwelling approvals are weakening. The 3-month moving average at 15.2K is close to reversing below its red signal line (15.1K), which would trigger a recession signal.

Australian Private Dwelling Approvals

Stock Pricing

ASX stock pricing increased to 80.75 percent, from a low of 67.85 seven weeks ago, approaching the high of 85.83 in February 2025. The reading above 80 percent signals that stock pricing is back in the extreme range.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

The ASX signals a mild bear market, but the risk of a significant drawdown is now extreme.

Acknowledgments

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US Market Leading Indicators

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.

Bull/Bear Market

Our Bull/Bear Market indicator remains at 60%, with two of five leading indicators signaling risk-off:

Bull-Bear Market Indicator

The National Financial Conditions Index from the Chicago Fed dipped to -0.606, signaling monetary easing.

Chicago Fed National Financial Conditions Index

However, outside of the 2022 COVID pandemic, the University of Michigan index of current economic conditions is at the lowest recorded level since its inception in 1960.

University of Michigan: Current Economic Conditions

Also, continued unemployment claims rose to 1.92 million on May 17, a 39% increase in the four-week moving average from its low in June 2022. However, the unemployment rate remains at 4.2% and does not warrant serious concern until it reaches 5.0%.

Continued Claims & Unemployment Rate

Stock Pricing

Stock pricing increased to 96.51, compared to 95.04 six weeks ago and a high of 97.79 percent in February. The extreme reading warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

We remain in the early stages of a bear market, with the bull-bear indicator at 60%. Stock pricing is extreme, with elevated risk of a significant drawdown.

Acknowledgments

Notes

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Signal vs Noise

Summary

  • The signal-to-noise ratio is exceedingly high, with market volatility obscuring the underlying trend.
  • Ignore the background noise of Trump policy flip-flops and focus on the effect of rising fiscal debt and long-term interest rates.

The S&P 500 is consolidating below 6000, a bullish sign. A breakout above 6100 would signal another advance, but the index has become a poor leading indicator of the economy. Instead, it is dominated by large passive investment flows into index ETFs, surges in liquidity, and the media cycle, which attempts to parse President Trump’s intentions by his daily sermon from the mount of Truth Social.

S&P 500

The bond market takes a longer-term view and is far more prescient than the equity market. Ten-year Treasury yields are gradually rising as international investors slowly withdraw, without wanting to trigger a panicked rush for the exits. Respect of the 50-week weighted moving average would signal another test of resistance at 4.75%.

10-Year Treasury Yield

The dollar is weakening, with the US Dollar Index testing the band of support between 98 and 100. A breach of 98 would warn of another decline, confirming our target of 90.

Dollar Index

Gold is in a strong uptrend, reflecting the same outflow from US capital markets, with a bullish consolidation below 3400 on the weekly chart below. Breakout above 3500 would strengthen our target of 4000 by the end of 2025.

Spot Gold

Consumers

A rebound in consumer confidence buoyed stocks, but the May reading of 98 remains in the same range as the 2020 COVID pandemic.

Conference Board: Consumer Confidence

Consumer expectations rallied to 72.8, but remains below the threshold of 80, which typically warns of a recession ahead.

Conference Board: Consumer Expectations & Present Situation

Economy

Manufacturers’ new orders for non-defense capital goods, excluding aircraft, were below their 2022 peak, at $74.8 billion in April.

Manufacturing New Orders: Non-Defense Capital Goods Excluding Aircraft

That seems pretty healthy, until we adjust for inflation. The chart below, adjusted by the producer price index for capital equipment, warns of a sharp decline in new orders that could easily reach its 2008 low if current instability continues. Corporations are likely to defer decisions on new capital spending until there is a stable outlook.

Manufacturing New Orders: Non-Defense Capital Goods Excluding Aircraft/PPI for Capital Equipment

Conclusion

Ignore the background noise of policy flip-flops and focus on the underlying signal in capital markets. Heightened uncertainty has triggered a steady capital outflow. If you destroy a brand—the USA bastion of democracy and economic stability—it is practically impossible to restore it.

The situation is aggravated by corporations deferring orders for new capital equipment because of the uncertainty. Declining capital investment is likely to tip the economy into recession.

Acknowledgments

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ASX Market Leading Indicators

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.

Bull/Bear Market

The ASX Bull-Bear Market indicator is unchanged at 54%, signaling a mild bear market.

Three of six indicators from Australia and China (our largest trading partner) signal risk-off. These have a combined weighting of 60% in the ASX Bull-Bear Index. The US Bull-Bear Index, also unchanged, makes up the remaining 40%.

ASX Bull-Bear Market Indicator

The ASX 200 Financials index ($XFJ) threatens to break out above 9320 on the weekly chart, which would signal a new uptrend. The indicator would switch to risk-on, reversing its bear signal from March 7, 2025.

ASX 200 Financials

However, China’s NBS manufacturing PMI fell sharply to 49.0 in April. Any further decrease would trigger a recession signal.

China: NBS Manufacturing PMI

Australian private dwelling approvals are also weakening. A reversal of the 3-month MA below the red signal line would also signal risk-off.

Australian Private Dwelling Approvals

Stock Pricing

ASX stock pricing eased slightly, to 79.65 percent, a sizable gain from 67.85 six weeks ago, but well below the high of 85.83 in February 2025.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

The ASX signals a mild bear market, while the risk of a significant drawdown remains high.

Acknowledgments

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US Market Leading Indicators

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.

Bull/Bear Market

Our Bull/Bear Market indicator remained at 60% this week, with two of five leading indicators signaling risk-off:

Bull-Bear Market Indicator

30-Week Smoothed Momentum is approaching zero on the S&P 500. A cross to below zero would complete another composite bear signal.

S&P 500 Twiggs Smoothed Momentum 30-Week

Stock Pricing

Stock pricing eased to 96.05, compared to 95.04 five weeks ago and a high of 97.79 percent in February. The extreme reading warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

We remain in the early stages of a bear market, with the bull-bear indicator at 60%. Stock pricing is extreme, with elevated risk of a significant drawdown.

Acknowledgments

Notes

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Big Beautiful Bill threatens bond market blowout

Summary

  • The bond market reacted to the record tax and spending bill in Congress that extends tax cuts for corporations and the wealthy
  • The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to the US federal debt, depending on whether policymakers extend temporary provisions
  • A weak bond auction lifted long-term yields
  • The dollar fell, while gold climbed above 3300

I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

~ James Carville, political consultant and lead strategist for Bill Clinton’s successful 1992 presidential campaign.

10-Year Treasury Yield
Weak bond auction

A $16 billion auction of 20-year Treasury bonds on Wednesday attracted less than usual interest, with yields rising to 5.127% after the auction.

“We’ve seen several soft 20-year bond auctions and it has a checkered history as a benchmark issue,” said Thomas Simons, chief U.S. economist at Jefferies in New York. “This one was not one of the best by any stretch of the imagination, but it also wasn’t one of the worst.”

Simons said while the auction was “far from a disaster,” it showed there was not going to be a reversal in the sell-off at the long end of the yield curve anytime soon. (Reuters)

Why is this a problem?

Liz Ann Sonders, Charles Schwab’s chief investment strategist, responded to a question on CNBC:  Is 4.58% on the 10-year a problem for the bond market?

It’s not so much the level that matters, it’s the “Why?” If this was driven by the growth trajectory, that would be great. But the fact is it’s driven by uncertainty with regard to inflation, and the Fed’s expected reaction. The wattage on the spotlight aiming at the debt and deficit has been turned up. The investor class cares deeply about this issue but the average voter can’t even conceptualize what 30-plus trillion dollars means and doesn’t tend to vote based on this. This spotlight on the issue is a good thing and will increase the chance that something gets done.

President Trump’s “big, beautiful” tax bill

The House Rules Committee advanced President Trump’s “big, beautiful” tax bill late Wednesday after 21 hours of debate and amendments, sending the legislation to the floor where it is expected to receive a final vote early Thursday morning.

The package includes a major spending increase for immigration enforcement and the military, and it would extend Trump’s 2017 tax cuts, which are scheduled to expire at the end of this year. It includes a series of cuts to Medicaid, food assistance, and clean energy funding to pay for the trillions of dollars in tax cuts and new red ink. (CNBC)

The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to US federal debt by 2034, depending on whether policymakers extend temporary provisions. (Reuters)

Rep. Chip Roy, R-Texas, and House Freedom Caucus chair Andy Harris, R-Md., were among the members who met with Trump at the White House Wednesday afternoon, in a hastily arranged effort to convince fiscal hawks to set aside their objections and back the deficit-exploding package of tax cuts.

Meanwhile, markets tumbled on concerns that Trump’s spending bill would pass, leading to exploding federal deficits and weaker long-term fiscal health. The yield on the 30-year Treasury bond hit 5.09%. (CNBC)

The Dollar & the Dow

The dollar weakened, with the US Dollar Index breaking below 100. Follow-through below 98 would warn of a long-term decline with a target of 90.

Dollar Index

The Dow Jones Industrial Average closed below its former primary support level at 42K. A follow-through below 41.5K would close the recent gap, signaling another test of primary support at 37K.

Dow Jones Industrial Average

Financial Markets

Recent weakness comes despite a sharp recovery in liquidity, with the Chicago Fed National Financial Conditions Index falling to -0.58.

Chicago Fed National Financial Conditions Index

Bitcoin also reached a new high of 110K, signaling a sharp increase in risk appetite in financial markets.

Bitcoin (BTC)

Gold & Physical Demand

Gold climbed above 3300, headed for a test of the resistance band between 3400 and 3500. A breakout would strengthen our target of 4000 by the end of 2025.

Spot Gold

A 700% year-over-year spike in COMEX physical gold deliveries in May 2025 (16,000 contracts, $5.3 billion), the largest in history, reflects unprecedented physical demand from institutions, possibly including the US government or Treasury. Despite the recent correction, gold’s rally to 3300 demonstrates resilience, with physical demand overwhelming paper price suppression. (Andy Schectman)

Conclusion

President Trump’s “big, beautiful tax bill” threatens a bond market revolt, with a steep rise in long-term Treasury yields if passed. The 10-year Treasury yield respected support at 4.5%, warning of a test of resistance at 5.0%.

Rising long-term yields would likely cause a sharp fall in the Dow and S&P 500.

The bipartisan Committee for a Responsible Federal Budget estimates the bill would add between $3.3 trillion and $5.2 trillion to US federal debt by 2034, depending on whether policymakers extend temporary provisions.

The dollar is weakening, and breakout of the US Dollar Index below 98 would confirm a long-term decline with a target of 90.

Gold is rising, and a breakout above 3500 would strengthen our long-term target of 4000 by the end of 2025.

Acknowledgments

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Gold rallies as the dollar weakens

Summary

  • The S&P 500 is consolidating below 6000, and financial market liquidity is improving
  • However, US stocks are underperforming their global counterparts
  • Gold rallies as LT Treasury yields rise and the dollar weakens

The S&P 500 is consolidating between 5800, its former primary support level, and 6000 on the weekly chart below. Breakout to a new high would signal a return to bull market conditions, but we expect strong resistance between 6000 and 6100.

S&P 500

The Dow Jones Industrial Average has similarly recovered above former primary support at 42K, but does not yet signal a reversal to a primary uptrend.

Dow Jones Industrial Average

US stocks continue to underperform their global counterparts, with the broad DJ US Index (DJUS) lagging the Dow Global ex-US ($W2DOW).

DJ US Index ($DJUS) & DJ World ex-US ($W2DOW)

Financial Markets

Bitcoin reached a new high at 107K, signaling strong risk appetite in financial markets.

Bitcoin (BTC)

A sharp fall in high-yield (junk) corporate bond yields signals improving credit availability in financial markets.

Junk Bond Spreads

Treasury Markets

10-Year Treasury yields are retracing to test new support at 4.5%. Respect will likely confirm our target of 5.0%.

10-Year Treasury Yield

Economy

The Conference Board’s leading economic index plunged sharply to 99.4% in April, the 1.0% drop following a 0.8% fall in March. The LEI is blue on the chart below.

Conference Board Leading Economic Index

Widespread weakness across the LEI’s ten components warns of a broad slowing of the economy.

Conference Board Leading Economic Index - Components

The LEI below 100 warns of a recession ahead (black line below), but six-month growth in the LEI (blue below) has not quite reached -4.1%, which would trigger a recession signal (red).

Conference Board Leading Economic Index - Recession Signals

Dollar & Gold

The Dollar Index is retracing to test the band of support between 98 and 100. Breach of support would signal long-term dollar weakness, offering a target of 90.

Dollar Index

Gold found support at 3200 and, after breaking above 3250, is headed for a test of resistance between 3400 and 3500. Our long-term target is 4000 by the end of 2025.

Spot Gold

Silver is testing resistance at 34. Breakout would offer a target of 39.

Spot Silver

Conclusion

The S&P 500 is rallying as financial market liquidity improves, but we expect strong resistance between 6000 and 6100. US stocks continue to underperform their global counterparts, while the Conference Board’s leading economic index warns that the US economy is headed for recession.

10-year Treasury yields are rising, and respect of support at 4.5% would offer a target of 5.0%, another bear signal for stocks. The dollar is weakening, reflecting international capital outflows from US financial markets. A breakout of the Dollar Index below long-term support at 100 would warn of another decline, with a target of 90.

Gold is rising as the dollar weakens, and we expect another test of resistance between 3400 and 3500. Breakout would signal a fresh advance towards our long-term target of 4000 by the end of 2025.

Acknowledgments

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ASX Weekly Leading Indicators

Bull-Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.

Bull/Bear Market

The ASX Bull-Bear Market indicator is unchanged at 54%, signaling a mild bear market.

Three of six indicators from Australia and China (our largest trading partner) signal risk-off. These have a combined weighting of 60% in the ASX Bull-Bear Index. The US Bull-Bear Index, also unchanged, makes up the remaining 40%.

ASX Bull-Bear Market Indicator

NAB forward orders remain below zero, signaling a contraction.

Australia: NAB Forward Orders

The OECD composite leading indicator for China improved to 101.03 in April, but this may have been affected by pre-ordering, which boosted exports ahead of the imposition of tariffs.

China: OECD Leading Composite Index

China’s NBS manufacturing PMI fell sharply to 49.0 in April. Any further decrease would trigger another recession signal.

China: NBS Manufacturing PMI

Stock Pricing

ASX stock pricing increased to 79.92 percent, a substantial gain from 67.85 five weeks ago, and approaching the high of 85.83 from February.

ASX Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

The ASX bull-bear indicator signals a mild bear market, while the risk of a significant drawdown remains high.

Australian private dwelling approvals are weakening, and China’s NBS manufacturing PMI is a hair’s breadth away from a recession warning; so the bull-bear indicator is on negative watch1.

Acknowledgments

Notes

  1. When a credit-rating agency places a company on negative watch, it indicates an increased likelihood of downgrading the rating in the near future.
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US Weekly Leading Indicators

Bull/Bear Market Indicator
Stock Market Pricing Indicator

The gauge on the left indicates bull or bear market status, while the right reflects stock market drawdown risk.

Bull/Bear Market

Our Bull/Bear Market indicator remained at 60% this week, with two of the five leading indicators signaling risk-off:

Bull-Bear Market Indicator

The University of Michigan consumer survey of current economic conditions recorded the second lowest reading since its start in 1960. The lowest was in the aftermath of the pandemic, in June 2022.

University of Michigan: Current Economic Conditions

Stock Pricing

Stock pricing rallied to 96.59, compared to 95.04 four weeks ago and a high of 97.79 percent in February. The extreme reading warns that stocks are at risk of a significant drawdown.

Stock Market Value Indicator

We use z-scores to measure each indicator’s current position relative to its history, with the result expressed in standard deviations from the mean. We then calculate an average for the five readings and convert that to a percentile. The higher that stock market pricing is relative to its historical mean, the greater the risk of a sharp drawdown.

Conclusion

We remain in the early stages of a bear market, with the bull-bear indicator at 60%. Stock pricing is extreme, warning of the risk of a significant drawdown.

Acknowledgments

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