NAB Research on Yield Curves – January 2019

Augmented Yield Curves in the US and Australia – what do they tell us about the growth outlook for Australia and the US?

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  • In this article we explore how useful Augmented Yield Curves are as an independent indicator of future growth – It is an edited and updated version of an article by Alan Oster (NAB’s Chief Economist) that appeared in the December 2018 edition of International Banker Magazine.
  • NAB Markets recently published a note on probit modelling from yield curves on the possibility of a US recession (in this week’s Australian Market Weekly). That suggested a possibility of around 25% – i.e. a mild chance but one that has increased recently.
  • While yield curves have some value in predicting growth momentum they can be improved by adding asset prices (equity markets and house prices) and a number of other country specific terms.
  • In the USA, oil prices, commodity prices (global growth proxy) the currency, and a credit rationing term, add value. In Australia adding value are; farm GDP (as a drought proxy), commodity prices, and a global economy proxy (US GDP).
  • The equations attempt to model quarterly GDP growth and lags are determined by the data. It also turns out that the yield curve is really a proxy for monetary policy mistakes – so real rates work just as well as yield curves.
  • Equations do a reasonably good job in quarterly forecasting barring unexpected shocks – such as a credit rationing term (important during the GFC in the US). Also lags on yield curves, oil prices, currency and commodity prices are quite long (6-8 quarters) so forward forecasts are less prone to the criticism that the forecasts are only as good as the input guesses.
  • The bottom line is the equations point to quite a slowdown in both economies – but no recession out in 2020. The slowing is more pronounced in the US where by late 2019 and into 2020 GDP looks set to slow to below potential (around 1¾%) while Australia could well slow to around 2– 2¼% as per our current GDP forecasts.
  • Indeed the updated version of the US modelling (largely to reflect lower equity and oil prices) points to significant weakness in the US in H2 2019 – where growth slows to around ¼% per quarter or a touch above 1¼ % in the year to December 2019. Growth in 2020 remains around 1¾% – albeit H1 2020 is stronger given oil price related effects and an assumed no fundamental further equity market correction. But again no US recession unless something else unexpected occurs.

Find further details in the NAB Yield Curve Note.