World Cup Market Impact & Yield Curve Signals For Recession
December 2, 2022
Yield Curve Signals
The “yield curve” is a snapshot of the bond market, showing the interest investors may expect to earn from bonds with different maturities. In normal times, the yield curve slopes upwards, but when shorter-term government bonds have higher yields than long-term, this is known as a yield curve inversion. This inversion is one signal or a leading indicator of a future recession as financial conditions become too restrictive. As we can see below, the current 10-year Treasury to 3-month T-bill yield inversion is 0.59%, which is the deepest since January 2001.
Leading indicators include economic variables that tend to move before changes in the overall economy. These indicators give a sense of the future state of the economy. Currently, the Conference Board’s U.S. Leading Economic Index also points to weaker GDP growth ahead, with housing and consumer sentiment index components leading the way. The historical magnitude of the yield curve inversion implies that the Fed is being successful in its quest to reign against inflation and thus should be done tightening early next year. As such, the U.S. market interest rate hike expectations may scale back as inflation moderates and growth slows. Historically, the yield curve (orange line in the below chart) ‘bull steepens’ into a recession, i.e., short-term Treasury yields decline more than long-term yields.
In our view, a return to a more normal inflation backdrop should be welcomed and a recession need not be a protracted one. This is particularly true as household and corporate balance sheets are in good shape compared to historical averages. Structurally high demand for U.S. labor and capital expenditures will likely be solid pillars for the business cycle recovery. Lastly, the 60/40 equity/bond asset allocation mix will likely stage a performance comeback in 2023 as fixed income and bond proxies will likely act as an offset to bouts of equity volatility amidst some recession-related earnings uncertainty.
World Cup in Qatar: The Most Expensive Ever
The FIFA World Cup kicked off this month with fans and teams from around the world flocking to Qatar. In one of the most controversial editions of the tournament’s history, many were against it. These controversial points seem to be mostly forgotten as fans cheer on their country. But some might find themselves asking, do major sporting events like the World Cup affect markets?
Research conducted in the past looking into this question, with sporting events from the 1970s to the early 2000s, found the effects were minimal, with only a 50bp downturn after losses at major sporting events. Believed to be because investors’ moods changed based on the outcome of matches. With only an alteration of 50bps, most would consider this a non-event, with the S&P 500 presently seeing changes on some days of more than 1-2%. So, while the results of sporting events might not cause too much of a change, other factors can.
Over the years, countries’ spending on the FIFA World Cup has slowly grown. However, this year in Qatar, a country that possessed minimal footballing infrastructure, we saw a sudden increase in spending. With the small nation spending over US$220 billion on stadium infrastructure, this is the most expensive world cup ever. Only US$6-10 billion is actually being spent on stadiums and pitches. The majority of the spending is on infrastructure for traveling fans, such as metros, hotels, and airports. This has not been needed at previous tournaments, but as the number of fans who watch the world cup grows, so does the amount of traveling fans. Looking to the future, we believe it is likely other countries will follow suit, which not only helps the economy but companies working in infrastructure development. All of this additional infrastructure is part of the World Cup and Qatar’s 2030 “National Vision.” This project aims to make Qatar a sustainable and developed economy by 2030. Qatar also stands to get back some of its investments in stadiums, with some of the stadiums planning to be dismantled and shipped to Uruguay for the 2030 World Cup. So, while major sporting events like the World Cup do not significantly affect the stock market, they help boost the national economy of the hosts significantly.
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The Conference Board Leading Economic Index is an American economic leading indicator intended to forecast future economic activity. It is calculated by The Conference Board, a non-governmental organization, which determines the value of the index from the values of ten key variables. These variables have historically turned downward before a recession and upward before an expansion. The per cent change year over year of the Leading Economic Index is a lagging indicator of the market directions.