Recession case and definitional perspective

Recession forecast approaches The phenomenon of recession is controversial at the moment, and when we talk about the US, it is also a threat that causes different approaches to the Fed’s monetary policy perspective from the market. Of course, there are many reasons to make this prediction in terms of economic causality in the global conjuncture. It is worth noting that different market indicators also give different signals in different tenors.

The effect of bond rates The effect of the decline in the US 10-year bond yields will perhaps expand a little more and we will be watching 2.70% in the 10-year tenor. Well, if we look at why the 10-years are reacting like this in an environment where the Fed is considering increasing interest rates so fast, the reason is obvious: Recession. An inverted yield curve is an indication that market participants think the Fed should eventually loosen monetary policy as economic activity weakens. On the other hand, the 2-years maintain its upward trend as it is the tenor that directly reacts to the monetary policy and current inflation movement. Result? 2-year bond yields are above 10-years and the yield curve is inverted.

Yield curve indicator An inverted yield curve has often been an indicator of an approaching recession. Any time the 10-year Treasury yield has fallen below the two-year yield in the last few decades has been a brief recession. In such reverse trends, the arrival of recession takes place in about 12-18 months. Since the situation we have mentioned points to the June – July 2022 time frame, there is a possibility of a recession in the US in the last quarter of 2023.

US historical yield curve position, 2-year and 10-year interest spread.

Recession qualitativeity According to economic terminology, a recession is defined by two consecutive quarters of contraction. This is, of course, the definition written in the economics book. We divide this into two as a technical recession and a large-scale recession in order to separate the real effects. A technical recession is a mild term and simply because it fits the book reveals the situations caused by the recession definition. For a real crisis effect, the indicators in the lower layers of the economy are considered as a whole. Real wages, non-farm employment, real consumption, real retail and wholesale sales, unemployment rate, production are the subset elements of economy, and among all these are the interrelated distortions. The Fed will look at the integrity of the economic activity components, not the two-quarter contraction of the economy. Therefore, the recession horizon alone is not enough for the Fed to abandon rate hikes.

Conclusion? In the latest model of the Atlanta Fed dated July 15, the forecast for real GDP growth in the second quarter of 2022 fell to -1.5%. The model calculation on July 8 showed -1.2%, so recent growth indicators suggest the possibility of the economy contracting for two consecutive quarters in a modest decline. The phenomenon that makes the strawberry effect on the cake is the positive outlook of the employment market. The latest employment report did not adversely affect the perception as it showed that the unemployment rate and job creation were more positive than feared levels.

The fact that oil has moved away from feeding the stagflation effect is also good news, because prices have dropped. Nominal growth will seem high due to inflation, but the upswing in inflation at the level reduced to real will perhaps reduce growth to negative in real terms. Of course, there is a paradoxical situation, because the inverse position of the yield curve is deeper than the 1990s, 2000 and 2007-08 levels. The difference in basis points between 2-year and 10-year is even deeper during the period of high inflation in the 1970s. So there are still some distortions. Whether the business will be in recession or stagflation will depend on the success of Central banks in beating inflation.

Kaynak Enver Erkan / Tera Yatırım
Hibya Haber Ajansı