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Risk of US recession back on the agenda for markets 

February 5, 2016

John Authers, Financial Times

The risk of a US recession is back on the agenda, and rapidly moving towards the top of it. As the year turned, with many concerns facing the globe, it was treated as axiomatic that there was no risk of imminent recession in the US, and hence any damage would be limited.

Any growth in recession risk from that low level would inevitably lead to falls in the price of risk assets, which is exactly what we have seen, even if an outright US recession remains on balance unlikely. The litany of market indicators that make no sense unless there is a clear and imminent danger of a recession is growing longer.

Long-term inflation expectations are their lowest since the crisis; the spreads on corporate and particularly low-quality high-yield credit are widening; the yield curve — as shown by the gap between two- and 10-year Treasury yields — is the flattest it has been since 2007, showing scant belief that inflation or interest rates will be rising in the years ahead. And of course the stock market is down, while within it defensive stocks like Walmart or Procter & Gamble are far outperforming cyclical stocks that would fare worst in an economic downturn.

These are all market-generated indicators. They show that we are now in at least the most severe US “growth scare” since the Great Recession in 2009, and these financial conditions in themselves heighten the risk of a recession, by making life harder for companies and consumers. Should the recession fears be averted, this also implies that there is a nice rebound to be had from stocks and from betting against bonds. Read more

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