Market is significantly under pricing US recession odds – TD Securities

Analysts at TD Securities think financial markets are significantly underpricing odds of the US economy hitting recession over the next 12 months. 

Key quotes

The current pricing for 28bp of cuts is consistent with the market penciling in about 20% odds of a recession.

Our yield curve-based recession probability models suggest 30-40% odds of a recession over the next 12 months, hinting that the market is significantly
underpricing these odds.

So, the market should be pricing in about 45-60bp of rate cuts in 2020, and we remain long January 2021 Fed funds to position for this possibility.

The Federal Reserve (Fed) is expected to keep the target range for the funds rate unchanged at 1.50-1.75% on Jan. 29. 

While the officials could take note of the easing of US-China trade tensions, they are likely to reiterate the case for an extended pause by citing more downside risks than upside risks.