Does it matter if spreads are dis-inverting because short yields are falling, or long yields are rising? MacKenzie and McCormick (Bloomberg) say yes. With long yields rising…

If it looked at first glance as though the shift in the yield curve was a solidly positive sign — one indicating that the economy is now at less risk of a recession than it was — that’s probably not the case. True, it shows traders aren’t expecting the Fed to shift into firefighting mode soon. Even so, it’s almost certain to further dampen the economy as it ripples through to mortgages, credit cards and business loans. That will tighten financial conditions further, which may be a welcome development to the Fed. The risk, though, is that it hits the brakes so hard that the economy stalls completely.

Does having a bull steepening prevent a recession? Figure 1, covering the Great Moderation, is somewhat conducive to that hypothesis, at least eyealling it. h

Figure 1: 10 year-3 month Treasury spread, % (blue, left scale), and 3 month change in 10yr-3mo spread, ppts (green, right scale). October observation for data through 10/13. NBER defined peak-to-trough recession dates shaded gray. Red arrows when 3 month change is positive during period when dis-inversion is occurring. Source: Treasury via FRED, NBER, and author’s calculations.

The evidence in favor of the bear steepening hypothesis is stronger when evaluating the proposition formally. I estimate probit models for (i) spread only, (ii) spread and short rate, and (iii) spread, short rate and 3 month change in spread. The 3 month change in spread is statistically significant and adds to the pseudo-R².

(ii)   Pr(recession=1)_t+12 = 0.813 – 76.11spread_t + 9.80i_t^short

Pseudo-R² = 0.28, Nobs = 241, bold denotes significant at 5% msl.

(iii)  Pr(recession=1)_t+12 = 0.736 – 98.37spread_t + 11.99i_t^short + 98.28Δ₃spread_t

Pseudo-R² = 0.34, Nobs = 241, bold denotes significant at 5% msl.

The recession probabilities are shown below.

Figure 2: Recession probability 12 month ahead estimated over the 1986-2023M10 period for spread (blue), for spread and short rate (tan), and spread, short rate, and 3 month change in spread (green). NBER defined peak-to-trough recession dates shaded gray. Source: NBER, and author’s calculations.

The bear-steepening specification implies 90% probability of recession in 2024M09, while it’s only 66.4% using the spread + short rate (peak probability for this specification is May 2024). Does this make me more pessimistic about avoiding a recession? Not really; the Ahmed-Chinn specification with the foreign term spread (but no steepening measure) was about 90.8% probability for September 2024.

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Does it matter if spreads are dis-inverting because short yields are falling, or long yields are rising? MacKenzie and McCormick (Bloomberg) say yes. With long yields rising…

If it looked at first glance as though the shift in the yield curve was a solidly positive sign — one indicating that the economy is now at less risk of a recession than it was — that’s probably not the case. True, it shows traders aren’t expecting the Fed to shift into firefighting mode soon. Even so, it’s almost certain to further dampen the economy as it ripples through to mortgages, credit cards and business loans. That will tighten financial conditions further, which may be a welcome development to the Fed. The risk, though, is that it hits the brakes so hard that the economy stalls completely.

Does having a bull steepening prevent a recession? Figure 1, covering the Great Moderation, is somewhat conducive to that hypothesis, at least eyealling it. h

Figure 1: 10 year-3 month Treasury spread, % (blue, left scale), and 3 month change in 10yr-3mo spread, ppts (green, right scale). October observation for data through 10/13. NBER defined peak-to-trough recession dates shaded gray. Red arrows when 3 month change is positive during period when dis-inversion is occurring. Source: Treasury via FRED, NBER, and author’s calculations.

The evidence in favor of the bear steepening hypothesis is stronger when evaluating the proposition formally. I estimate probit models for (i) spread only, (ii) spread and short rate, and (iii) spread, short rate and 3 month change in spread. The 3 month change in spread is statistically significant and adds to the pseudo-R².

(ii)   Pr(recession=1)_t+12 = 0.813 – 76.11spread_t + 9.80i_t^short

Pseudo-R² = 0.28, Nobs = 241, bold denotes significant at 5% msl.

(iii)  Pr(recession=1)_t+12 = 0.736 – 98.37spread_t + 11.99i_t^short + 98.28Δ₃spread_t

Pseudo-R² = 0.34, Nobs = 241, bold denotes significant at 5% msl.

The recession probabilities are shown below.

Figure 2: Recession probability 12 month ahead estimated over the 1986-2023M10 period for spread (blue), for spread and short rate (tan), and spread, short rate, and 3 month change in spread (green). NBER defined peak-to-trough recession dates shaded gray. Source: NBER, and author’s calculations.

The bear-steepening specification implies 90% probability of recession in 2024M09, while it’s only 66.4% using the spread + short rate (peak probability for this specification is May 2024). Does this make me more pessimistic about avoiding a recession? Not really; the Ahmed-Chinn specification with the foreign term spread (but no steepening measure) was about 90.8% probability for September 2024.

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According to Chainalysis, Latin American crypto users show a significant preference for centralized exchanges, in contrast to the worldwide pattern.

According to a recent report from blockchain analytics firm Chainalysis, Latin America has a distinct inclination toward centralized exchanges when compared to the rest of the world, as opposed to decentralized exchanges.

Published on October 11, Chainalysis stated that Latin America has the seventh-largest crypto economy in the world, trailing closely behind the Middle East and North America (MENA), Eastern Asia, and Eastern Europe.

However, it notes that crypto users in Latin America strongly favor using centralized exchanges:

Latin America shows the highest preference for centralized exchanges of any region we study, and tilts slightly away from institutional activity compared to other regions.

Furthermore, in some countries within the region, crypto activity by platform type significantly exceeds the global average. The worldwide average is 48.1% for centralized exchanges, 44% for decentralized exchanges, and 5.9% for other decentralized finance (DeFi) activities.

However, Venezuela shows a 92.5% preference for centralized exchanges, compared to a 5.6% preference for decentralized exchanges (DEXs).

Furthermore, it pointed out that Venezuela has a unique reason for its surging adoption, primarily attributed to a "complex humanitarian emergency."

Related: Crypto adoption is booming, but not in the US or Europe — Bitcoin Builders 2023

The report explains that amid the COVID-19 pandemic in 2020, crypto played a pivotal role in directly assisting healthcare professionals in the country. 

Therefore, crypto became a necessary form of value as traditional payments were difficult, given the government's refusal to accept international aid, influenced by political reasons.

On the other hand, Colombia shows a 74% preference for centralized exchanges, while decentralized exchanges account for just 21.1% of their preferences.

Meanwhile, three Latin American countries secured positions in the top 20 ranks on Chainalysis' Global Crypto Adoption Index. Brazil stands at the 9th position, with Argentina following at 15th, and Mexico at 16th.

At the global level, India claims the leading spot, with Nigeria and Vietnam securing second and third positions, respectively.

Magazine: The Truth Behind Cuba’s Bitcoin Revolution: An on-the-ground report

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