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Recession Watch (Oct.)

With the yield curve un-inverting, our composite model indicates that the probability of a recession in 12 months’ time has fallen to 11.7%, from a recent peak of more than 20%. Nevertheless, we shouldn’t make the mistake of concluding that the threat has passed completely – the yield curve did occasionally un-invert ahead of historical recessionary experiences. It is rare for the probability to reach 20% without a recession following within the next year or two although, as we have stressed before in our Focus, the structural decline in the term premium on long-dated bonds means that the yield curve might not be as reliable as a recession indicator in the current environment.

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