U.S. Treasury Bond Yields and Declining Restaurant Labor Personnel: Is a Recession Forthcoming?
By Gavin Davis Managing Principal, H-Fin Capital Advisors | June 16, 2019
Much attention has been recently placed on the inverted U.S. Treasury Yield Curve, where longer-dated U.S. Treasury securities (e.g. Fed Funds Rate approximating 2.50%) express a Yield-to-Maturity lower (i.e. inversion) than shorter-dated U.S. Treasury securities (e.g. 10-year UST under 2.50%), as a harbinger of recession, which in the current environment, we find mostly (but not entirely) misplaced.
If anything, we find yield curve inversions always insightful and worthy of discussion; however, with a propensity for yield curve inversions to be: (a) "early," with significant "risk runaway" before the onset of a recession (if one arrives at all); (b) to be "inconclusive" as a sole data point in their issuance of a statistically significant number of historical false positives as recession tell-tales; and, (c) in the current environment, where U.S. and Global Sovereign Yields are affected by a confluence of new factors (it really is different this time), most prominently amongst those, the substantial and profound effect of the large-scale asset monetization of sovereign debt (and other collateral) by global central banks (e.g. U.S. Federal Reserve, European Central Bank, Bank of Japan) from quantitative easing programs, rendering historic yield curve inversions as less applicable than absent such influential factors in the bond markets.
We, ourselves, still queue on a variety of data when evaluating "recession" risk, and separately timing - sometimes as simple as U.S. Lodging RevPAR growth, which has clearly slowed and remains subdued (no one can argue that either the business cycle or lodging cycle, which have held a historic and studied high correlation, are long in the tooth) - or, as we put forth herein, a somewhat paradoxically novel, simplistic and insightful metric: the monthly change in restaurant labor personnel for full-service restaurants in New York City.
We speak from a position of expert knowledge, experience and recent accurate Federal Reserve interest rate (fed funds) predictions.
By way of background, as part of monitoring the global macro environment and geopolitics in order to provide H-Fin clients with a view into global interest rate markets, as Interest Expense is often the largest expense face by hotel real estate owners, we spend an inordinate amount of time closely monitoring the U.S. Federal Reserve, short term interest rates and risk premia.
Mr. Davis has correctly predicted every single U.S. Federal Reserve Fed Funds decision during the current business cycle, including accurately predicting both the beginning (12 mo in advance) and end of such interest rate cycle (Dec. 2018). (for our forecasting track record see a recap of our recent commentary on our April 1, 2019 blog post.
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