[Summary] Meta's Halved Earnings Deepen Recession Concerns... US Bond Market "Code Orange"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina, Reporter Jeong Hyeonjin] Following Microsoft (MS) and Google Alphabet, pessimism surrounding future economic growth is rapidly spreading as even Meta Platforms, the parent company of Facebook, reported its earnings halved. In the New York bond market, the yield on the 3-month U.S. Treasury surpassed the benchmark 10-year yield, leading to assessments that a recession "Code Orange" (the second-highest alert level) has effectively been issued.

However, some expect that as fears of a recession increase, the Federal Reserve (Fed) may slow the pace of tightening.

◆Meta’s Net Profit Halved Due to Sharp Drop in 'Core Revenue' Advertising Sales

Meta, Facebook’s parent company, announced its Q3 earnings after market close on the 26th (local time), reporting revenue of $27.714 billion and net profit of $4.395 billion. Compared to a year ago, revenue decreased by 4%, and net profit fell to less than half. The advertising market, Meta’s main source of income, has frozen, and losses were particularly large in the metaverse (extended virtual world) business, which was positioned as a new growth engine.

The outlook is also unfavorable. Q4 revenue is expected to fall short of initial forecasts, marking the third consecutive quarter of decline. Due to the significantly reduced net profit and the Q4 outlook, Meta’s stock price plunged about 20% in after-hours trading following the earnings announcement, returning to levels seen in early 2016.

The shock from Meta’s earnings follows those of Alphabet and MS the previous day, heightening concerns. As these companies, which rank among the top in market capitalization on the New York Stock Exchange, reported online advertising results worse than expected, fears of slowing market profits have grown. These negative corporate earnings factors are directly linked to recession concerns.

◆3-Month and 10-Year Treasury Yield Inversion: "Recession Countdown Begins"

On the same day, the bond market saw a further intensification of the yield inversion phenomenon between short- and long-term U.S. Treasury bonds, signaling recession risks. The 3-month U.S. Treasury yield traded at 4.024%, surpassing the 10-year yield of 4.005%. Following the inversion between the 10-year and 2-year yields in early July, the 3-month yield also exceeded the long-term 10-year yield. This is the first time since the pandemic began in March 2020.

An inversion where long-term bond yields fall below short-term yields is generally interpreted as a recession warning signal. According to economist Arturo Estrella, a former New York Federal Reserve official, since the late 1960s, a yield inversion between 3-month and 10-year bonds has been followed by a recession within 6 to 15 months.

Campbell Harvey, a Duke University professor known as a "yield curve pioneer" who has researched the correlation between yield curve inversion and recessions, said, "We cannot call this a 'Code Red' based on a day or two of inversion, but it is definitely a 'Code Orange,'" warning that "the (recession) countdown has begun." Code Orange is the second-highest level in the U.S. five-tier terror alert system, just below Red.

In particular, the inversion between the 10-year and 3-month yields is an indicator closely monitored by the central bank, the Fed. Earlier, Fed Chair Jerome Powell emphasized the 3-month yield after the 2-year yield temporarily surpassed the 10-year yield earlier this year, raising recession concerns. MarketWatch reported, "Signs that a U.S. recession is imminent continue to accumulate." Goldman Sachs CEO David Solomon warned at a forum that the U.S. economy could face a prolonged downturn.

Moreover, experts are paying attention to the fact that the 10-year and 3-month yield inversion was confirmed amid growing expectations that the Fed may slow the pace of rate hikes starting in December. The expectation of slowing began spreading in late last week, driven by concerns that excessive monetary tightening could cause unnecessary economic slowdown. If the inversion continues through the Federal Open Market Committee (FOMC) meeting on November 1-2, it is expected to add weight to these recession warnings.

Due to recession concerns, expectations for the Fed’s pace adjustment were slightly strengthened on the day. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market reflects over a 55% probability of a "big step" (0.5 percentage point rate hike) in December following the "giant step" (0.75 percentage point hike) in November.

◆New Home Sales Down 11%... U.S. Economic Indicators Also Slow

Recent major economic indicators are also signaling economic slowdown.

With the average mortgage rate surpassing 7%, additional indicators confirming cooling in the housing market emerged on the day. New home sales in the U.S. for September fell 10.9% from the previous month. This is the largest decline since a 12.4% drop in April and marks the fourth double-digit decrease this year. Compared to the same month last year, the decline was even steeper at 17.6%. Single-family housing starts last month also dropped 18% year-over-year.

The Conference Board’s consumer confidence index for October, released the previous day, also fell to 102.5 from 107.8 in the prior month, below market expectations. This suggests worsening consumer sentiment amid growing fears of economic slowdown.

This content was produced with the assistance of AI translation services.