Recession Model Update (March 2020)
Friends,
Last month, it was difficult finding things to write about. Not the case this time.
As of now (Sunday evening, U.S. Eastern Time):
For the first time since the financial crisis, E-mini S&P futures have hit the limit down band of -5%.
Oil futures are dropping -25% to -30%.
10Y yield is on pace to hit a record all time low of 0.50%, and 30Y yield is hovering around 1.00%. The entire UST curve is now trading under the Fed Funds upper target rate.
Current Predictions (as of March 7, 2020)
While probabilities have ticked up only slightly, it will take a while for the full impact of COVID-19 to hit economic data.
Treasury Yields
I hesitate to quote US Treasury yields, since they are currently moving -15 to -20 bps tighter overnight. But going forward, it will be interesting to watch the two common yield spreads (10Y minus 2Y, 10Y minus 3-month), as both are still currently *not inverted*, despite yields collapsing to all-time lows.
Turbulence
*Note: the below Turbulence figures were later found to be erroneous. Please send me a message for more details.
Last week's Raw Turbulence of 16.19 lands it at 3rd place in the list of most turbulent weeks since 1997.
Global market Turbulence (exponentially weighted moving average of Raw Turbulence) is now rising to levels last seen in:
March 2008 (Bear Stearns)
January 1998 (Asian Financial Crisis)
Recall that the academics behind the Turbulence Index calculation found evidence that:
Financial turbulence is highly persistent across time.
You can save money by avoiding risk assets during bouts of financial turbulence, since financial asset prices tend to fall during turbulent periods (as opposed to non-turbulent periods).
Until Next Time
Terrence | terrencez.com
View previous updates in the archive.
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