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Tuesday, September 27, 2022

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Is A Recession In The U.S. Imminent?: Motilal Oswal’s Take


BQ Prime’s special research section collates quality and in-depth equity and economy research reports from across India’s top brokerages, asset managers and research agencies. These reports offer BQ Prime’s subscribers an opportunity to expand their understanding of companies, sectors and the economy.

With inflation posting a new high every month, the U.S. Federal Reserve is expected to hike the federal funds rate by another 75 basis points next week, though a 100 bps hike is not off the table.

While it has pushed the three-month yield on the Treasury Bill to 2.5% (from ~1.7% in mid-June 2022), the yield on the 10-year bonds has fallen below 3%, down from its recent peak of 3.5% a month ago.

Consequently, the spread between the two maturities (three months-10 years) has fallen to just 0.5% from 1.6% a month ago. The spread between the two-year and 10-year bonds has turned negative in July-22.

An analysis of all U.S. recessionary episodes since the mid-1960s suggests that the economy enters into a recession anytime between five and 16 months after 3M10Y spread turns negative, or between eight and 18 months after 2Y10Y spread (two-year yield available from CY76) turns negative.

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