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US, European Stocks Plunge on Recession Worries

Ken Bredemeier

   WASHINGTON - U.S. and European stock markets plunged sharply Wednesday
   as key economic indicators signaled the distinct possibility of a
   global recession in the next year.

   Key indexes in New York fell more than 2% in midday trading, while
   markets in Europe sustained similar losses. The bellwether Dow Jones
   average of 30 key U.S. stocks was down more than 700 points at one
   point, reversing sharp gains on Tuesday after the United States
   announced it was delaying a new 10% tariff on key Chinese imports.

   Analysts pointed to weak German and Chinese economic data as warning
   signs of a possible world economic slowdown, but most importantly, to a
   so-called yield curve inversion for interest rates on two- and 10-year
   U.S. Treasury notes.

   Typically, interest rates on longer-term government bonds are higher
   than those for shorter periods of time. But when that interest rate
   phenomenon is reversed, as occurred Wednesday, it can be a sign that
   investors have worries about the immediate state of the U.S. economy,
   the world's largest, and are demanding a higher rate of return on the
   shorter-term notes.

   The yield on a 10-year Treasury note briefly hit 1.622%, dropping below
   the 1.634% yield for a two-year bond, although the longer-term yields
   moved higher in later trading ahead of the two-year notes.

   It was the first time such an interest rate inversion had occurred
   since 2005, two years before the start of the U.S. recession that was
   the country's worst economic downturn since the Great Depression of the
   1930s. Millions of U.S. workers lost their jobs in the recession a
   decade ago, as well as their homes, when they no longer had enough
   money to make monthly home loan payments.

   The bond interest rate inversion has preceded the last nine U.S.
   recessions over the last six decades, although the barometer is not a
   perfect indicator. No recession occurred in 1966, even though there had
   been an interest rate inversion.

   China said its factory production was the weakest in 17 years, while
   Germany, Europe's most powerful economic engine, said its economic
   output shrank in the April-to-June period by one-tenth of a percentage
   point.

   

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