Recently, the interest rate spread of 10y-2y US bonds has been upside down, which has exacerbated the market's concern about the US economic recession. From the perspectives of term spread, debt risk and economic momentum, combined with historical experience and current situation, this paper makes a detailed analysis of the risk of American economic recession, and further analyzes the impact of economic recession on the Fed's interest rate increase and a large number of assets.
Core conclusion: from the perspectives of term spread, debt risk and economic momentum, the US economy may decline as early as the end of 2023 or the beginning of 2024. If the Fed raises interest rates as currently expected, it may stop raising interest rates early next year.
I. term spread Perspective
\u3000\u30001. Principle of term spread predicting economic recession: the reason why the term spread of US bonds can predict economic recession can be understood from two dimensions: first, the yield of short-term bonds is basically only affected by monetary policy, and the yield of long-term bonds is jointly affected by monetary policy and economic expectation. Therefore, term spread is equivalent to excluding monetary policy and only reflecting economic expectation. Second, the yield of long-term bonds can be regarded as the composite value of the yield of short-term bonds and a series of forward interest rates, and the upside down of the term spread means that the market expects to reduce interest rates in the future, that is, the economy may decline.
\u3000\u30002. Leading relationship between different term spreads and economic recession: the commonly used term spreads mainly include 10y-3m, 10y-1y and 10y-2y. Historical experience shows that 10y-2y inversion can often predict the recession earlier. We comb through the six recessions in the United States since 1980 and find that the 10y-2y spread inversion is usually 1-3 years ahead of the economic recession, with an average of 19 months.
\u3000\u30003. The economic recession signal reflected by the current term interest margin: the 10y-2y interest margin of US debt reversed briefly in early April, and now it is only about 30bp; The 10y-1y spread has narrowed to less than 100bp, and the 10y-3m spread is still widening. If the Federal Reserve raises interest rates according to the current market expectation rhythm, the three major interest rate spreads may be upside down in the second half of the year. Referring to the historical law, the US economy may decline at the earliest by the end of 2023, and the recession risk will be higher in 2024.
II. Debt risk perspective
\u3000\u30001. Debt status of US residents: judging from the asset liability ratio, debt income ratio, debt service ratio, loan default rate and other indicators, the current debt pressure of US residents is relatively light, even lower than before the epidemic, which is mainly due to financial subsidies, better employment, asset appreciation and other factors. This means that residents' debt will not at least become a trigger for the U.S. recession, and even if the U.S. recession occurs, it will not be as serious as the subprime mortgage crisis in 2008.
\u3000\u30002. US corporate debt situation: after the outbreak of the epidemic, the US government launched large-scale aid loans, which restrained the outbreak of corporate debt crisis. However, the government bailout is essentially a debt extension, which has not fundamentally alleviated the debt pressure of enterprises. At present, the stock debt and asset liability ratio of non-financial enterprises in the United States are significantly higher than before the epidemic, but the debt income ratio is lower than before the epidemic, reflecting that the pressure on stock debt is still large, but due to strong profits, the risk of default in the short term is low.
\u3000\u30003. Follow up debt pressure Outlook: more than two-thirds of the liabilities of U.S. residents and enterprises are long-term debt. The interest rate increase mainly affects short-term debt, and long-term debt is more affected by long-term interest rate. In the future, due to the economic slowdown and the fall of inflation, the yield of long-term US bonds is likely to decline again, and the residential mortgage interest rate will also decline. Therefore, the overall debt pressure of residents will not increase significantly. However, the economic slowdown and tight liquidity will lead to the widening of credit spreads, so that the yield of corporate bonds is more likely to rise. Superimposed on the slowdown of profit growth, the pressure on corporate debt will continue to intensify.
III. from the perspective of economic kinetic energy
\u3000\u30001. Analysis on the prosperity of private consumption in the United States: in terms of consumption capacity, under the background of the cessation of financial subsidies and basic full employment, it is difficult for residents' income to maintain high growth; In terms of consumption intention, with the decline of residents' income expectation and the Federal Reserve's interest rate increase, the consumption intention rate probably fell. On the whole, the US consumption boom has passed the strongest stage and tends to weaken in the future.
\u3000\u30002. Analysis on the prosperity of private investment in the United States: in terms of investment capacity, due to the pressure of debt, enterprises have limited ability to expand capital expenditure; In terms of investment intention, at present, the growth rate of new orders is still rising, but the enterprise profit expectation has begun to decline. On the whole, the US private investment boom will remain high in the short term, but tend to weaken in the medium and long term.
\u3000\u30003. Historical law of economic prosperity indicators: by comparing the performance before the past six rounds of recession and linear extrapolation according to the current situation, PMI of manufacturing industry indicates that there are still 25 months to decline, PMI of service industry indicates that there are still 21 months to decline, and cli, a comprehensive leading indicator, indicates that there are still 16 months to decline, which is very close to the signal reflected by term interest margin as a whole.
IV. impact of the US economic recession
\u3000\u30001. Impact on the Fed's interest rate hike: considering various factors, if the Fed raises interest rates according to the rhythm expected by the current market, that is, if the interest rate hike exceeds 200bp within the year, it may stop raising interest rates in early 2023. However, we prefer to believe that with the slowdown of the US economy and the fall of inflation, the pace of subsequent interest rate hikes may slow down, and the time to stop interest rate hikes will be postponed accordingly.
\u3000\u30002. Impact on major categories of assets: historical experience shows that most U.S. stocks began to decline 1-3 months before the recession, and will continue to decline for 1-3 months after the recession. The performance after that depends on the severity of the recession. U.S. bond yields performed differently before the recession. They rose rapidly due to tight liquidity in the first two months after the recession, and then fell again due to monetary easing. The medium and long-term trend depends on the severity of the recession. The US dollar index mostly fell in 4-6 months after the recession and mostly rose in 6 months. After the recession, gold prices mostly rise in the short term and fall in the medium and long term, and the time law is not obvious.
Risk tip: geopolitical conflicts exceeded expectations, the Fed's monetary policy exceeded expectations, and the US fiscal policy exceeded expectations.
