NEW YORK (Reuters) - Chances are remote the U.S. economy will fall into a recession in the next 12 months despite a recent flattening of the U.S. yield curve suggesting growing recession risk, Deutsche Bank’s economists said on Monday.
Based on other bond market indicators, they estimated the probability of a U.S. recession from now to June 2018 at less than 10 percent.
This compared with the yield curve, or the gap between long-dated and short-dated yields, which currently implies roughly a 33 percent chance of a recession.
“Despite this development, we do not see U.S. recession risk as particularly elevated; indeed, we think it is quite low for the next year,” Deutsche Bank economists wrote in a research note.
Historically, a sharp flattening of the yield curve has preceded a recession as traders pile into longer-dated Treasuries in anticipation of an economic contraction.
On Monday, the two-year to 10-year portion of the Treasury yield curve flattened to 83.80 basis points, its tightest since early October. It reached nearly 137 basis points in December, which was its steepest level in a year, Tradeweb data showed.
Analysts and traders have attributed the curve flattening to doubts about any forthcoming fiscal stimulus from Washington and recent economic data that fell short of expectations.
Still, some aspects of the U.S. economy such as the labor market and housing continue to perform well without signs they will overheat in the next 12 months, Deutsche Bank economists said.
However, a further tightening of the labor market in the next 18 months might force the Federal Reserve to accelerate its pace of rate increases, raising the chances of a recession by 2020, according to the bank’s economists.
“The more hawkish scenario would clearly move the Fed’s policy stance to a level that would make a recession likely by late-2019 or 2020,” they wrote.
The Fed’s policy setting committee holds a scheduled meeting later this week, at which it is expected to raise its benchmark interest rate to a target range of 1.00 to 1.25 percent.
(Corrects year to 2020 from 2010)
Reporting by Richard Leong; Editing by Chizu Nomiyama