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Weekly Economic Insights - 14 January 2019

Macro Highlights - 1/16/2019

Highlights of the week

Economist insights: In the US, the Federal Reserve said it is “listening” to markets; activity has slowed again in the eurozone

United States

  • The Federal Reserve indicated it could be patient, which reassured investors

Eurozone

  • Drop in economic sentiment in the eurozone
  • Negative outlook for French consumption and German industry

Focus Structural Analysis: Is an inversion of the yield curve an early indicator of recession?

  • The estimates of our econometric model indicate that the flattening of the yield curve does enable us to predict a near-term recession for the US, the UK and Germany
  • Based on these estimates, the probability of entering a recession in the next 12 months works out at 8.7% for the US, 3.5% for the UK, and 0.0% for Germany
  • However, the constraint of the ‘effective lower bounds’ of the key rates, and the implementation of QE could result in a bias in the estimation of the probability of recession
  • According to our analysis, this distortion is limited in the US and relatively limited in the UK, while we deem it to be substantial for Germany

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