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Economic Outlook: Difference between revisions
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=== 1. Yield Curve === | === 1. Yield Curve === | ||
According to a Chicago FED research<ref>https://www.chicagofed.org/publications/chicago-fed-letter/2018/404#ftn3</ref>, the yield-curve slope becomes negative before each economic recession since the 1970s. | According to a Chicago FED research<ref>https://www.chicagofed.org/publications/chicago-fed-letter/2018/404#ftn3</ref>, the yield-curve slope becomes negative before each economic recession since the 1970s. That is, an “inversion” of the yield curve, in which short-maturity interest rates exceed long-maturity rates, is typically associated with a recession in the near future. | ||
In their research there are mainly two reasons driving the yield curve inversion: | In their research there are mainly two reasons driving the yield curve inversion: | ||
# If investors see higher odds of a recession, the long-term inflation risk premium in Treasury bonds will fall. In recent recessions, the risks of unexpectedly low inflation have increased relative to the risks of unexpectedly high inflation. This is explain because in periods of low inflation, the fixed nominal cash flows from a nominal bond become more attractive, driving up the prices of these bonds and lowering their interest rate. | # If investors see higher odds of a recession, the long-term inflation risk premium in Treasury bonds will fall. In recent recessions, the risks of unexpectedly low inflation have increased relative to the risks of unexpectedly high inflation. This is explain because in periods of low inflation, the fixed nominal cash flows from a nominal bond become more attractive, driving up the prices of these bonds and lowering their interest rate. | ||
# If investors see greater risk of recession, they will attribute higher value to short-term assets that they can easily liquidate to finance spending on goods and services. Hence, they will require higher compensation | # If investors see greater risk of recession, they will attribute higher value to short-term assets that they can easily liquidate to finance spending on goods and services. Hence, they will require higher compensation to keep holding long-term securities. This means a yield curve inversion in this escenario is an expectation of lower odds of a recession. | ||
Due to these contradictory reasons, not all yield curve inversion will signal a recession, thats why is important to understand the current enviroment we are in and the sentiment among inversions. Since several surveys has been done recently already, especially the latest Philadelphia Fed survey of professional forecasters shows the probability of a recession in the next year is the highest in the 50+ years this survey has been conducted<ref>https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q4-2022</ref>, we can conclude than this time investors are pricing in higher odds of a recession in the yield curve inversion. | Due to these contradictory reasons, not all yield curve inversion will signal a recession, thats why is important to understand the current enviroment we are in and the sentiment among inversions. Since several surveys has been done recently already, especially the latest Philadelphia Fed survey of professional forecasters shows the probability of a recession in the next year is the highest in the 50+ years this survey has been conducted<ref>https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q4-2022</ref>, we can conclude than this time investors are pricing in higher odds of a recession in the yield curve inversion. | ||
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What is the current data telling us? | What is the current data telling us? | ||
# The 10Y2Y spread<ref>https://fred.stlouisfed.org/series/T10Y2Y</ref>: Current inversion around is -70 bps, worst level since 1980s, the contuining inversion started on July 2022. | |||
# The 10Y3M spread: Current inversion around -80 bps, worst level since the data is available, the contuining inversion started on October 2022. | |||
# Majority of the yield curve is inverted at this moment, this condition has always preceded a recession <ref>http://www.worldgovernmentbonds.com/country/united-states/#:~:text=The%20United%20States%2010Y%20Government,last%20modification%20in%20December%202022).</ref> | |||
In conclusion, | |||
== References == | == References == | ||