And no, it's not the inverted yield curve.

In fact, it has nothing to do with interest rates, and we urgently need to talk about it.

I'll also be discussing recent economic data, upcoming inflation data, and what investors should look out for this week.

So this is where I want you guys to pay very close attention and make sure you stick around until the end because you don't want to miss this.

To begin, one of the most accurate indicators of a recession has been the 10-year minus 3-month yield spread chart.

And I've talked about this before, but just to give you a quick gist, this is a chart that plots the difference in interest rates of 10-year treasury yields and 3-month treasury yields.

When yields on 3-month treasuries exceed the yields on 10-year treasuries, this graph will go into negative territory, as you can see right here.

This is essentially another way of showing an inverted yield curve.

And the yield curve is a graph that plots the interest rates of bonds according to their maturity dates.

When interest rates on short-term bonds exceed long-term bonds, you get an inverted yield curve.

And remember, this only happens when the Federal Reserve hikes up interest rates.

But there's a slight misunderstanding here.

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Let's move on.

You have to remember that the yield curve can be inverted for an extended period of In fact, in all past recessions, when the yield curve reverted back to positive is when a recession actually occurred.

And when the yield curve reverts to positive, it means that interest rates were cut.

But determining whether the economy will go into a recession cannot strictly be based on interest rates.

There are many other factors that go into this whole equation.

And one of the most important ones is unemployment rate.

The Federal Reserve pays very close attention to this.

Unemployment rate gives us key insight into business growth and overall economic growth.

Rising unemployment can have a negative impact on consumer spending and business investments, which can ultimately lead to a slowdown in GDP growth.

And remember that a recession is characterized by two consecutive quarters of negative GDP growth.

Right now, unemployment rate seems to be rising consistently.

And last week's report on unemployment came out higher than what analysts expected at 4.1% as opposed to 4%.

And this also happened in the last three reports, all of which came out 0.1% higher than expectations.

Now, you would assume that this would be bad for the markets.

However, in a high interest rate environment, this is actually a positive catalyst.

Because with rising unemployment comes the risk of economic contraction.

So the Federal Reserve will start cutting interest rates in order to stimulate the economy, reducing the cost of borrowing for businesses and consumers, and therefore encouraging spending and investing, which will attribute to economic growth and more job creation and ultimately serve as a positive catalyst for the markets.

On July 5th, after the release of recent unemployment data, the S&P 500 rallied another 0.5% and the Nasdaq 100 rallied more than 1%.

Ten-year Treasury yields fell sharply that day, closing down 1.5%.

And it's important to note that the 10-year Treasury yield is a representation of the market's expectation of interest rates.

A drop in 10-year yields signals that investors are anticipating lower rates in the future.

So this is a connection that investors should always look out for.

Now, circling back to unemployment, given its importance, there's an indicator that strictly uses this as a means of predicting a recession.

And this is the Sam Rule Recession Indicator, which recently has started signaling a recession.

This is an indicator that was developed to provide a real-time signal of the start of a recession strictly based on changes in unemployment rate.

And the way it works is actually very simple.

The rule states that if the three-month average unemployment is 0.5% higher than the previous 12-month low, then a recession is already underway.

So let's break that down a little bit because it does sound confusing.

However, it is actually very simple.

So right now, if you look at the past three-month headline unemployment rates, which were 3.9%, 4%, and 4.1%, the average of the three is 4%.

And if you look at the previous unemployment rate from 12 months prior, which would be July of 2023, unemployment rate was at 3.5%.

So this shows that the three-month average is 0.5% higher.

And when you look at the Sam Rule Recession Indicator, you see a steadily rising chart.

But of course, if you look at the number, it's actually at 0.43 rather than 0.5.

And this is because the unemployment rate in the month of June was actually 4.05%, but it was rounded up to 4.1%.

So technically, the three-month average would right now be 0.43% higher than July's unemployment rate.

But if you consider the fact that unemployment rates have been steadily rising, and the actual results have been higher than the estimates for three consecutive months, well, you can be quite certain that next month's unemployment rate will likely trigger the Sam Rule Recession Indicator.

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Now, back to the video.

So how accurate has this indicator been so far?

If we look at the past recessions, like the Great Recession of 2008, this indicator hit 0.5 in April of 2008.

And if you look at the S&P 500's close in April of 2008, within 11 months, the markets fell 51%.

And the same goes for the Recession of 2001.

The Samrel Recession indicator was triggered at 0.5% at around June of 2001.

The market subsequently fell 40% in the 10 months that followed.

Now, remember, in both cases, the indicator wasn't timing the top of the markets.

In fact, the markets have already sold off a decent amount before the indicator was triggered.

In 2008, the S&P 500 had sold off around 13%, and in 2001, the markets have already sold off around 20%.

Now, this isn't to fearmonger anyone, and you also have to keep in mind that every economic situation is different as history doesn't always repeat itself.

So what does this mean for investors moving forward?

For now, the markets are continuing on their very strong rally, and that is all due to the AI movement with big tech carrying the entire market.

But it is also thanks to the hopes of interest rate cuts.

Because remember, in the current high interest rate environment, interest rate cuts are a positive catalyst for the markets.

And as I mentioned earlier, unemployment data was another positive catalyst, which also led to a relatively strong rally in the markets.

But this week, we have CPI inflation data being released, and the markets are extremely sensitive to this.

And really, there's two key reasons here.

For one, just like with rising unemployment, the markets will react positively to declining inflation.

Inflation is the key reason why the Federal Reserve has consistently decided to keep interest rates at 5.5% for the past year.

They have constantly stated that they will start cutting interest rates once they see confirmations of dropping inflation.

And the most important thing to note here is that if the Federal Reserve is premature with their rate cuts, that will actually boost inflation even higher, which is a major risk for the economy.

So we can expect the markets to react positively if we see inflation numbers either in line with estimates or below estimates.

If they are even slightly below estimates, the markets will react very positively.

And we saw that happen last month in June, where CPI inflation data came in 0.1% below estimates, which triggered a very strong rally.

The S&P 500 closed up almost 1% and the NASDAQ 100 rallied around 1.5%, forming a gap in the daily chart because the major spike was initiated in pre-market.

And 10-year treasuries fell more than 3% that day.

And this week, Thursday, July 11th, could be another one of those days.

So this is why investors need to pay very close attention to this.

Right now, core CPI month-over-month estimates are in line with last month's results at 0.2%.

And year-over-year CPI is actually forecasted 0.2% below previous results.

So if the numbers come in in line with these estimates, the markets will react positively.

But if they come in below estimates, then another strong rally could be triggered.

But what if the numbers come in above estimates?

Well, without a doubt, this will be a negative catalyst for the markets.

But it may also give rise to another major concern.

One that Jamie Dimon, the CEO of JP Morgan, has also expressed his concerns about.

And that is stagflation.

You see, if inflation continues on a sideways trend, or in other words, continues to be sticky, then the Federal Reserve will be put in a very tough situation regarding interest rates.

As I mentioned before, interest rate cuts are heavily influenced by inflation.

And if the Federal Reserve sees stagnant inflation, then they will have less reason to start cutting rates because they do not want to have inflation rise again.

But at the same time, we have to remember that right now, we have rising unemployment and slowing GDP growth.

And interest rate cuts are used to stimulate the economy when unemployment rises and GDP growth slows.

So a combination of high inflation, but slowing GDP growth and rising unemployment is not a good scenario whatsoever.

The last time we saw this happen was in the 1970s.

And Jamie Dimon himself just stated that he's worried that the economy looks more like the 70s than we've seen before.

Now, of course, the economy right now is very different from the 1970s because there was an oil and energy crisis.

Without a doubt, the markets are very sensitive to inflation data right now.

So that is why you guys have to pay very close attention when it comes to these key dates.

And I will post these dates in my community tab.

So make sure you keep an eye out for that.

And that is all for this one.

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Thank you guys so much for watching.

And I will see you in my next one.

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