Is the Yield Curve Pricing In Another Recession?

• Historically, empirical research has shown that the yield curve has been the best predictor for forecasting recessions. In short, an inversion of the yield curve, in which short-maturity interest rates exceed long-maturity interest rates, is generally associated with a recession in the near future.
• It is interesting to see that the Czech 2Y10Y yield has recently inverted, therefore increasing the odds of an economic downturn.
• In recent months, we have seen that while short term rates have been retracing sharply higher amid the aggressive tightening cycle run by the CNB, the magnitude of the move on the long-end of the curve has been significantly lower, leading to a constant flattening of the yield curve.
• With inflationary pressures expected to remain elevated until at least the end of this year, participants continue to price in aggressive hikes in the coming meetings. Policymakers are likely to debate whether the central bank should hike by 50bps or 75bps at the next meeting on November 4.
• However, the government recently decided to reintroduce some restrictions amid rising Covid cases, which could lead to a significant downward revision in growth expectations.
• Therefore, can the CNB board continue to deliver an aggressive tightening cycle, running the risk of accelerating a downside scenario in the coming months?

Source: Bloomberg/MNI