Economics & Growth | Monetary Policy & Inflation | US
Recession Probability at 72% Ahead of Jackson Hole
- By Dalvir Mandara and Bilal Hafeez
- 2 min read
Hawkish rhetoric has returned to markets. While short-end and long-end yields were relatively contained, in the belly of the curve, yields moved higher. As a result, US 2s10s steepened, but remained inverted at -27bps. We, however, think there is a risk that the US 2s10s spread could fall as low as -200bps with a preference for more weakness in the US short-end.
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Hawkish rhetoric has returned to markets. While short-end and long-end yields were relatively contained, in the belly of the curve, yields moved higher. As a result, US 2s10s steepened, but remained inverted at -27bps. We, however, think there is a risk that the US 2s10s spread could fall as low as -200bps with a preference for more weakness in the US short-end.
On recession probabilities, our model, which uses the 2s10s part of the yield curve, assigns a 72% chance of a recession within the next twelve months (Charts 1 and 3). Meanwhile, the Fed’s recession model, which uses the 3M10Y part of the yield curve, remains close to 21% (Chart 2).
Background to Models
We introduced two models for predicting US recessions using the slope of the US yield curve. When long-term yields start to fall towards or below short-term yields, the curve flattens or inverts. This has often predicted a recession in subsequent months. Our model is based on the 2s10s curve compared to a model from the Fed that is based on the 3M10Y curve. We believe that the 2Y better captures expectations for Fed hikes in coming years and is, therefore, more forward-looking.
