Alarm bells are ringing: What markets are trying to warn us about the economy
CBC
Financial markets are not the economy and the economy is not financial markets. But it's often said that they're both afraid of the same things. In this case, the concern is that the economy is careening toward a recession.
"The alarm bells are telling us that something is going to break somewhere in the financial system," said Karl Schamotta, chief market strategist at Corpay, a foreign exchange service in Toronto.
Stock markets have sold off over the past three months. Since the beginning of July, the TSX wiped out all of the gains it made in the first half of the year.
U.S. stock indexes, such as the S&P 500 and the Dow Jones Industrial Average, have remained in positive territory, but not by much.
Those markets reflect a doomy prognosis that isn't necessarily backed up by the economic data.
GDP and jobs numbers have shown a surprising resilience. The most recent figures indicate that the economy was flat in July, while a preliminary estimate shows it expanded again in August.
Canadian employers added 64,000 jobs in September.
That's a far cry from the forecast of a recession through the third quarter of this year.
But Schamotta says that surprising resilience doesn't negate the fact that Canadian households and businesses are in the midst of the most aggressive cycle of interest rate hikes this country has ever seen.
"We know historically when borrowing costs have risen this much that that stresses some part of the financial system — and as Warren Buffett likes to put it, when the tide goes out, suddenly we see who's swimming naked," he told CBC News.
Stock markets are a notoriously volatile, fickle way of guessing where the economy is headed. The bond market is much bigger and far less whimsical.
And this week the bond market started flashing red.
Stock markets, where investors buy ownership slices of companies, get all of the attention, but the bond market — where companies and governments go to borrow billions of dollars each and every day — is a much more fascinating gauge for smart prognosticators like Schamotta.
Investors have been selling older bonds in exchange for newer ones that pay more. That bond sell-off has driven down the price of those bonds, but the yield — the percentage return that you'd get from holding them — has moved sharply higher.
