US recession risks low, UBS says

The odds of a US recession by the third quarter of 2016 remained low - at about 16.5% - economists at UBS said, referencing a proprietary credit-based gauge of risks.

In their opinion, the best leading predictors of a recession were: 1. the year-on-year rate of change in corporate leverage; 2. year-on-year changes in bank non-performing loans; 3. year-on-year changes in bank non-performing loans; 4. the Fed´s Senior Loan Officer Survey.

"Our prior research suggests high-yield spreads are far from the gold standard in terms of forecasting recession start dates," UBS strategist Stephen Caprio said in a research report sent to clients.

On their numbers, the risks of a recession - often defined as two consecutive quarters of negative readings on gross domestic product - stood at 16.5%.

Not only that, the indicators they outlined lead deterioration in high-yield credit and not the opposite, he pointed out.

So what indicators should investors keep tabs on?

Tightening in non-bank trade credit and Fed´s SLOS would show if worsening conditions in the market for high-yield debt was spilling over into ther funding markets, Caprio said.

Should corporate earnings, as measured by the Bureau of Economic Analysis, fall by between 5-6% year-on-year through 2016 then recession risks would increase, he added.

"Today's weakness from China and low oil prices may represent an exogenous shock to credit that should be watched closely for spill-over effects. However, we don't believe that current high-yield spreads are signaling the US economy is about to contract.

"Structural changes in the ownership and trading of high-yield credit have increased liquidity premiums. Hence, cash spreads today may not be the best barometer."