This Is "Worrisome": The Probability Of A US Recession Surges To 60%, Deutsche Calculates

Ever since the US manufacturing economy entered a recession over half a year ago as a result of the collapse in capex spending in the energy sector and the soaring layoffs in shale, the strawman used by the economic apologists to "justify" that the broader economy has not followed in such recessionary footsteps, has been the frequent trotting out of the yield curve, which simply because it is still curved upward in nominal terms (if flattening recently to levels not seen since 2007), is presented as "evidence" that the US is still growing.

Just one problem: as Bank of America first explained in February, when one adjusts the curve to account for trillions in unprecedented liquidity support by the Fed which is skewing the message sent by the 2s10s (for example by looking at the 3m5s OIS adjusted curve), the curve is already inverted.

Over the weekend, following the latest collapse in long-term yields to new all time lows, Deutsche Bank looked at what implied recession odds are if one once-again adjust for Fed intervention. What it found, in the words of Deutsche Bank's Dominic Konstam, is "worrisome."

From Deutsche Bank:

Since the UK referendum the US yield curve has flattened to new post-crisis lows. The 3m10y spread is now 115 bps compared to 210 bps at the start of the year, and the 2y10y spread is just 85 bps versus 120 bps on January 1. 

 

This relentless flattening of the curve is worrisome. Given the historical tendency of a very flat or inverted yield curve to precede a US recession, the odds of the next economic downturn are rising. 

 

In our probit model, the probability of a recession within the next 12 months has jumped to 60 percent, the highest it’s been since August 2008. The model adjusts the 3m10y spread by the historically low level of short rates and it suggests that on an adjusted basis the curve has already appeared to be inverted for some time.

 

The yield curve had successfully signaled the last two recessions when the model output rose above 70 percent. If 10y yields rally to 1.00 percent and the 3m rate is unchanged, the implied recession probability from our model will reach that number. At current market levels, the market is just 40 bps from that distinct possibility.

In other words, while the Fed is terrified of killing the recovery by "tightening" financial conditions, all that will take for the next recession to arrive is for the Fed and its central bank peers to ease just that much more to send the long end 40 bps lower, something which as we reported yesterday may happen even sooner than expected, now that pension funds are ready to throw in the towel and start buying 10Y and 30Y Tsys with wreckless (sic) abandon.