Transcript: Can the yield curve still predict recessions?

This is an audio transcript of the FT News Briefing podcast episode: ‘Can the yield curve still predict recessions?’

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Marc Filippino
Good morning from the Financial Times. Today is Tuesday, January 23rd. And this is your FT News Briefing.

We now know how the SEC’s X account got hacked. And the US economy is humming along. But I have three words for you: inverted yield curve. 

Jennifer Hughes
Since 1960, it’s only once suggested there will be a recession and it was wrong. Every other time the yield curve caused a recession. 

Marc Filippino
Plus, a huge IT company in Japan is in hot water over its role in the UK Post Office scandal. I’m Marc Filippino, and here’s the news you need to start your day.

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The X account of the Securities and Exchange Commission got hacked a few weeks ago. Someone posted from the account right before the SEC greenlit spot bitcoin exchange traded funds. It made it seem like the SEC had already granted approval, which threw the whole world of cryptocurrency into chaos. The SEC said yesterday that the hack happened after someone took control of the cellphone linked to the X account. They did it through something called a SIM swap, which basically involves transferring a phone number to a different device without the owner’s permission. The hacker then changed the SEC’s X password. Another interesting tidbit: the SEC said that it asked X to disable multi-factor authentication a few months prior to the attack, due to, quote, issues accessing the account. It’s back on now for pretty obvious reasons, but I think there’s a lesson there for all of us folks. Keep on multi-factor authentication.

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The US economy looks like it might be on the up and up. There’s lower inflation, positive signalling from the Federal Reserve on interest rates, and the stock market is setting records. But one thing still isn’t sitting well with economists — the dreaded inversion of the yield curve on government bonds. This is usually an ominous clue that a recession is about to hit. And the yield curve? Well, it’s been inverted for a while now. Here to talk to us about it is Jen Hughes, our US markets editor. Hi, Jen. 

Jennifer Hughes
Hey there. 

Marc Filippino
All right, so let’s start with the basics for people who don’t geek out on the yield curve inversion the way that we do. What is a yield curve? And what are we talking about when we say that it’s inverted? 

Jennifer Hughes
I’ve got to say I confess I’ve long been a yield curve geek. I love this stuff. So what, the basics of the yield curve is that normally shorter-dated interest rates should be lower, that is, cheaper than longer-term ones. The idea being that it should be cheaper if I’m lending you money for three months, I’ve got a fairly good idea that you’ll pay me back. If I’m lending you money for 10 years, I probably want to charge you a bit more interest for the risk that you don’t pay me back in that time. When that inverts, when those longer-term yields are lower than short-term ones, that’s the inverted yield curve. And that’s just . . . it’s basically a signal that something is amiss. Something isn’t right. 

Marc Filippino
OK. And so then, when this yield curve inverts I’m actually making more money off the interest rate in that three-month loan, the short-term loan than I am on the 10-year loan. Right?

Jennifer Hughes
Pretty much. 

Marc Filippino
And we should say we’re talking about US treasuries here. So Jen, why do we use the inverted yield curve as a signal for a recession? 

Jennifer Hughes
I think the main thing is the yield curve’s reliability. For about 60 years, since 1960, it’s only once suggested there will be a recession and it was wrong. Every other time the yield curve caused a recession. It happened in the ‘80s. It happened in 2000. The yield curve inverted in those cases. In 2006, ahead of the 2008 global financial crisis, it caused it. The yield curve really caused a recession every time. So while every time is different, the yield curve is usually right, so far. 

Marc Filippino
What’s the explanation for why there hasn’t been a recession yet even though the yield curve has inverted? 

Jennifer Hughes
What we got to watch for is that there’s usually a lag between it happening, the yield curve inverting, and the recession that follows. We’re roughly slap bang in the middle of what should be the recession period, or when it should start. The main thing I’m hearing this time around is the idea that all the stimulus from government, from everything else during and post the pandemic is what’s delayed it, that there’s been so much money sloshing around the system that it’s kind of deadened the market. It’s not reacting quite properly. 

Marc Filippino
Is it possible that we just don’t get a recession, Jen? I mean, do you think that we’re still on track for a soft landing, you know, lowering inflation without tipping the US economy into a recession? 

Jennifer Hughes
It’s possible, for sure. But one thing I think that might sort of marry up the two things, the soft landing plus the yield curve, is that the soft landing doesn’t necessarily preclude a shallow recession. So we could have a point where we do get two quarters of negative economic growth. That’s normally what we mean as a technical recession that you need at least that. So that’s roughly the definition we’re using here. But it’s not a sharp, painful one where companies start panicking and laying off staff. You know, it sort of feeds on itself. We might technically hit a recession, but perhaps it won’t be the most painful one on record. And here’s hoping on that. 

Marc Filippino
Jen Hughes is the FT’s US markets editor. Thanks, Jen. 

Jennifer Hughes
Thank you. 

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Marc Filippino
A television drama that recently aired in the UK set off a political firestorm. It tells the true story about how Post Office workers were wrongly convicted of fraud. The problem all boiled down to a software glitch, and the software came from a Japanese company called Fujitsu. It took over the UK’s largest computer maker, ICL, in 1990, and provided the faulty software for the Post Office. The scandal has landed the company in pretty hot water.

Kana Inagaki is the FT’s Tokyo bureau chief, and she joins me now to talk about Fujitsu. Hey, Kana. 

Kana Inagaki
Hi there. 

Marc Filippino
So before we dive into its role in the Post Office scandal, can you give me a sense of just how big of a player Fujitsu is in the global IT space? 

Kana Inagaki
Fujitsu has like, a market value of about 28bn, and it’s one of the biggest technology conglomerates in Japan. So in its home market, it’s quite famous for providing a lot of the IT systems for public infrastructure, whether it’s the Tokyo Stock Exchange, the banking groups or the Japanese government. Elsewhere, globally, it’s also known, for example, for its technology and artificial intelligence. So it’s quite wide-ranging technology conglomerate. 

Marc Filippino
And what’s the back story here? How did Fujitsu software become so significant for the UK postal service? 

Kana Inagaki
For Fujitsu, it was really the deal that provided a really important gateway for the Japanese group into Europe. And the Horizon IT system that Fujitsu developed was developed to replace the UK’s paper-based social security payment system. But there were issues with the software from the very start. They had technical failures, but what came to light more recently through this public inquiry is that, you know, executives at Fujitsu UK have made it that both Fujitsu and the Post Office were aware that the software had faults from the very beginning. 

Marc Filippino
Well then, how much could Fujitsu actually be liable for then in terms of penalties, compensation and things like that? 

Kana Inagaki
So at this moment, Fujitsu has not made it clear how much they’re going to compensate the victims. They said that they have a moral responsibility to pay the compensation. But analysts are saying that even with the compensation included, that the financial impact on the company as a whole is probably likely to be limited since, you know, Fujitsu UK generates only about 5 per cent of the Japanese conglomerate’s annual revenue. 

Marc Filippino
OK, so it’s not gonna sink the company financially. Are there any other potential fallouts for Fujitsu? 

Kana Inagaki
Yeah, throughout this whole entire scandal, investors and analysts have said the financial impact is small. And it seemed like the company also saw this issue as a problem for the UK. But more recently, as this issue became such a big political storm and, you know, sparked public outcry in the UK, there’s now concerns about the reputational damage that this scandal could cause for the Japanese group as a whole. And also, I mean, this is not the first time that Fujitsu has had faults with their system. The Horizon IT system is in the UK, but in recent years there has been problems with some of the systems that the Japanese group has provided to the Japanese government, the banking groups or even the Tokyo Stock Exchange. So put all of these issues together, some analysts have raised concerns about whether there could be broader questions asked about Fujitsu’s technology in general. 

Marc Filippino
Kana Inagaki is the FT’s Tokyo bureau chief. Thanks, Kana. 

Kana Inagaki
Thank you. 

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Marc Filippino
Before we go, we have a very special announcement. We’re launching a weekend edition of the briefing called Swamp Notes. And we’re gonna focus on US politics in the run-up to the US presidential election this fall. Every Saturday morning, you’ll hear from FT reporters and columnists as they break down everything from what the election will mean for the economy, to what the stakes are for the rest of the world. The first episode is this week, Saturday, January 27th, and you don’t have to do anything. It’s gonna drop right here in this feed.

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You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news. 

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