Today from M. Abecasis/GS:
resource: M. Abecasis, “Introducing our Recession Watch Tracker”, vol. american dailyGoldman Sachs, December 2, 2022.
I find it interesting why they partially discount the estimates for the standard term spread model:
When financial market participants see a higher probability of a recession, they are more likely to expect the FOMC to cut the federal funds rate to stimulate the economy. We doubt that traditional yield curve modeling would generate a reasonable chance of a recession in the current environment, as the Fed may be more reluctant to ease policy for specific growth and employment outcomes when inflation is high. But while quantifying recession probabilities based on historical experience can produce misleading results, the relationship between policy rates and growth still makes market pricing of the funds rate a useful signal of expectations for the likelihood and timing of potential recessions. Currently, the bond market expects a rate hike in the second quarter of 2023, but a rate cut of 42 basis points in the second half of 2023 (compared to 33 basis points at the end of October), 87 basis points in the first half of 2024 (vs. Half-year rate cut of 57 basis points (vs. 31 basis points).
Here’s a picture of the 10yr-3mo and 10yr-2yr term spreads as of today’s close:
figure 2: 10-3M Treasury spread (blue) and 10-2Y spread (red), %. Source: U.S. Department of the Treasury, author’s calculations.
Both spreads are now firmly in negative territory. My latest estimates (data as of November 23) here.
