U.S. stock futures were sharply lower Wednesday morning as the bond market flashed its strongest recession signal yet. The 2-year Treasury yield inverted and moved higher than the 10-year yield for the first time since 2007. The Dow Jones Industrial Average, S&P 500 and Nasdaq broke a two-session losing streak on Tuesday, in a strong rally on the Trump administration's announcement of delays and removals of certain items on the new tariffs that had been set to go into effect Sept. 1.
The inverted yields on the 2-year and 10-year Treasurys is an odd bond market phenomenon that's been a reliable indicator of economic recessions. Wall Street often pays special attention to the spread between the 10-year and the 2-year because flips in that part of the yield curve have preceded every recession over the past 50 years. A recession occurs on average 22 months following such an inversion, according to Credit Suisse.
The flight to the perceived safety of U.S. bonds accelerated in recent days as concerns about the global economy due to the U.S.-China trade war mount. On Wednesday, the Chinese economy showed more weakness as the U.S. tariffs appeared to be taking their toll. China's July industrial output rose 4.8% — slowest in 17 years. Retail sales growth in China was also weaker than expected last month.
China is accusing Democratic House Speaker Nancy Pelosi and Republican Senate leader Mitch McConnell of inciting chaos in Hong Kong. President Donald Trump wrote on Twitter that he "can't imagine why" anyone would blame the U.S. for "the problems" in Hong Kong. Anti-government protests in the Chinese territory crippled airport operations Monday and Tuesday.
Another sharp drop in mortgage rates, linked to declining bond yields, sent even more homeowners to their lenders hoping to save money on their monthly payments. Refinance applications soared 37% last week, according to the Mortgage Bankers Association's seasonally adjusted index. Total mortgage application volume jumped 21.7% last week compared with the previous week. Mortgage rates have plateaued this week, despite continued turbulence in international markets.