The US recession probability model based on the
Treasury spread is a simple straightforward forecasting tool that can be
followed in real time. If the spread term negative, watch out, economic winter
is coming. Nevertheless, there are only a limited number of recessions and a
limited number of signals. What is as useful is watching how the probability of
a recession changes during non-recession periods. Periods of growing economic
stress will see an increase in recession probability. For example, periods when
the probability is more than 10% or even more than 5% will be times when equity
markets will be under stress. These periods may pass without a recession, but
there will be an impact on financial markets. This signal may have to be
confirmed with other data since it provides early warnings, but it is valuable
as a simple indicator.
The current reading at close to 10% is clearly
showing that the economy may be seeing more stress. Granted, short-rates are
manipulated by the Fed, but this warning
could suggest a need for allocations to divergence strategies.
No comments:
Post a Comment