Recession Probability Stays Close to 70% After Employment Report

2Y yields briefly topped 3.5% on 1 September – its highest level since the end of 2007. However, the rise was more than reversed following Friday’s employment report (2Y dropping 12bp on the day). The report saw nonfarm payrolls rise by 315,000 jobs and the unemployment rate increase to 3.7%. US 2s10s has consequently steepened but remains inverted at -20bps.

Our recession model, which uses the 2Y10Y part of the yield curve, assigns a 69% chance of recession within the next twelve months (Chart 1 and 3). Meanwhile, the Fed’s recession model, which uses the 3M10Y part of the yield curve, produces a 19% chance of recession (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.

Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. 

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

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