Photo taken on May 21, 2020 shows the U.S. Treasury Department building in Washington, D.C., the United States. (Photo by Ting Shen/Xinhua)

The US economy is facing rising risks of contraction, which could spark an unexpected financial crisis that would pummel its stock market, observers said, based on the difference between the yields on 2- and 10-year Treasury notes, now the widest in about 40 years. 

Observers warned that the US' financial woes may trigger a financial tsunami similar to that of 2008 in the world and dent the global economic outlook this year, while China - in stark contrast - will continue acting as the "beacon of hope", injecting much-needed stability into the world economy.

According to a note issued by DataTrek, the 2-year US Treasuries was trading at a yield of 4.241 percent on Monday, compared with a yield of 3.578 percent on the 10-year notes. It's the steepest inversion since early 1980s, which economists said should set off alarms about an impending recession in the US.

An inverted yield curve is a "notorious predictor" of a recession, and it preceded the downturns of 1990, 2001 and 2008, according to a report by the Business Insider. 

"The 2-year yield has outpaced that of the 10-year note since last year, but the gap has been widening due to the Fed's aggressive interest rate hikes, which tightened market liquidity. The difference laid bare the perilous situation of the US economy," Dong Dengxin, director of the Finance and Securities Institute of the Wuhan University of Science and Technology, told the Global Times on Tuesday. 

Last year, the Federal Reserve raised its key interest rate by 425 basis points in a bid to tame runaway inflation. The interest rate was lifted from near zero to between 4.25 percent and 4.5 percent now. Two Federal Reserve officials said on Monday they expect the policy rate to surpass 5 percent in 2023, and the rate should hold above that watermark for "a long time," the Financial Times reported.

"The interest rate rise cycle usually takes three to five years, but Washington signaled that it would complete it within this year, drastically shrinking the cycle to two years. Such an aggressive move could prick the US economy's bubble, fueling a financial crisis that would send its stocks into a huge selloff in 2023," Dong said. "It also spells more danger for the world economic recovery," he added. 

According to Bankrate's fourth-quarter economic indicator poll, the US economy has a 64 percent chance of contracting in 2023, based on the average forecast among economists. 

In contrast, several financial institutions have upgraded their 2023 GDP forecasts for China amid the country's optimization of its COVID-19 response.

Economists at Morgan Stanley raised their China GDP forecast for 2023 to 5.7 percent, an increase of 0.3 percentage points, according to a research note published on Monday. According to a Fortune report, BlackRock economists forecast 6 percent GDP growth in China this year in a research note released on Monday.

Global Times