Global outlook darkening, says Citi

As the US economy enters its seventh year of expansion following the 2008-09 crisis, the probability of recession will reach 65 per cent, Citi’s rates strategists wrote in their 2016 out- look.

A rapid flattening of the bond yield curve towards inversion would be a key warning sign.

“The cumulative probability of US recession reaches 65 per cent next year,” Citi’s rates strategists wrote.

“Curve inversion will likely come more quickly than the consensus thinks.”

Normally, short-dated yields such as two-year yields are lower than longer-dated ones like 10-year yields, as investors demand a premium for taking on risk several years into the future.

The curve has inverted before each of the last five US recessions since the mid-1970s.

In China, deflationary pressures and downside risks to growth will force Beijing to loosen fiscal policy, let the yuan depreciate and perhaps become the first major emerging market economy to cut interest rates to zero, Citi said.