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Watch for US Recession, Zero Interest Rates in China Next Year, Citi Says


Trader Andrew Silverman (c) works on the floor of the New York Stock Exchange, Dec. 2, 2015.
Trader Andrew Silverman (c) works on the floor of the New York Stock Exchange, Dec. 2, 2015.

The outlook for the global economy next year is darkening, with a U.S. recession and China becoming the first major emerging market to slash interest rates to zero both potential scenarios, according to Citi.

As the U.S. economy enters its seventh year of expansion following the 2008-09 crises, the probability of recession will reach 65 percent, Citi's rates strategists wrote in their 2016 outlook published late on Tuesday. A rapid flattening of the bond yield curve towards inversion would be an key warning sign.

"The cumulative probability of U.S. recession reaches 65 percent next year," Citi's rates strategists wrote in their 2016 outlook published late on Tuesday. "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 U.S. 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.

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    Reuters

    Reuters is a news agency founded in 1851 and owned by the Thomson Reuters Corporation based in Toronto, Canada. One of the world's largest wire services, it provides financial news as well as international coverage in over 16 languages to more than 1000 newspapers and 750 broadcasters around the globe.

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