What Information Is the Yield Curve Yielding?

Conclusion: The yield curve is a supportive data point in the Hedgeye Mosaic projecting slowing sequential growth.


We were interested to see the IMF raise global GDP growth forecasts last week.  The IMF is now expecting world growth to be 4.5%.  Collectively, the IMF is projecting 3.25% growth in the United States, 1% growth in the Euro region, Japan at 2.5%, and emerging economies at 6.75%.


Most interesting to us is that the IMF actually upped its forecasts for U.S. growth.  For 2010, the forecast for U.S. growth was revised up 0.2% to 3.3% and for 2011 U.S. GDP growth estimates were raised by 0.3% to 2.9%.  Given that U.S. GDP grew 2.7% in Q1, the IMF is actually suggesting that from its prior estimate, in April 2009, growth in the United States has been accelerating.  Needless to say, we are not seeing this same acceleration in economic growth.


In our Q2 Theme Call on July 1st, we actually went in print with our view of GDP growth for 2010, 2011, and 2012, which are 2.5%, 1.7%, and 1.7% respectively.  Obviously, the point of GDP estimates is to provide directional views, not precise numbers.  More specifically, the point of our estimate is simply that we expect growth domestically to slow sequentially in the coming quarters and years.


The foundation supporting our view is that debt and deficit issues will constrain the ability of the U.S. government to provide additional stimulus, and in fact may lead to some form of austerity.  Either lower government spending or an implementation of austerity, will lead to slower sequential growth over the coming quarters and years.


Interestingly, the yield curve seems to be predicting even lower GDP growth in the United States than Hedgeye.  According to recent paper from the Cleveland Federal Reserve:


“Since last month, the three-month rate has dropped to 0.09 percent (for the week ending June 18) from May’s 0.17, and this also comes in below April’s 0.16 percent. The ten-year rate dropped to 3.26 percent from May’s 3.33 percent, also down from April’s 3.85 percent. The slope increased a mere 1 basis point to 317 basis points, up from May’s 316 basis points, but still below April’s 369 basis points.


Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.00 percent rate over the next year, just up from May’s prediction of 0.98 percent. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.”


We’ve also attached a chart of the yield curve. Directionally the curve seems to be more supportive of the Hedgeye view of a sequential deceleration of growth versus the IMF’s view of a sequential acceleration.


Daryl G. Jones

Managing Director


What Information Is the Yield Curve Yielding? - 10Y 3M

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