Jobs Data Sees Recession Probability Remain Elevated

US treasury yields were volatile last week with the 2s10s inversion hitting -108bps on Monday – its deepest since 1981 during the Volcker era. Furthermore, the yield on the policy-sensitive US 2Y breached 5% on Thursday after the US ADP private sector employment report revealed 497,000 private-sector jobs were added in June against expectations of 220,000.

Friday saw the first negative surprise in headline NFP since August 2022. We believe this does not change the big picture: labour demand growth is slowing from the unsustainable highs of the pandemic, but not enough to relieve inflationary pressures. The Fed is on track to hike 25bps this month and we expect a second 25bp hike in November.

Turning to market moves, US 10Y yields closed the week at 4.06% (+21bps WoW, +37bps MoM) while the yield on the policy-sensitive US 2Y closed the week at 4.94% (+7bps WoW, +48bps MoM). In terms of yield curve inversion, the magnitude of the 2s10s inversion sat at -88bps on Friday. The probability of recession increases with yield curve inversion.

The probability of recession within the next twelve months, assigned by our recession model, which uses the 2Y10Y part of the yield curve, closed the week at 92% (Chart 1). Meanwhile, the Fed’s recession model, which uses the 3M10Y part of the yield curve, produced a 60% 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 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. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.

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.

Photo Credit: depositphotos.com

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