The global economy is showing a few tentative signs of improvement, but risks remain. Manufacturing is on a downtrend worldwide, but the services sector remains relatively resilient. In the United States, warning signs are flashing. Parts of the U.S. Treasury yield curve inverted as the yield on the 10-year note dipped below the yield of the 3-month bill. However, demand dynamics are playing a role. In March, the Federal Reserve signaled no rate hikes in 2019 and downgraded its growth outlook. Despite the warning signals, we believe the probability of a recession remains low.
Meanwhile, Europe continues to face headwinds of weaker demand for its exports from China and elsewhere, and political problems closer to home. Germany, the region's largest economy, has been flirting with recession in recent months. In addition, the British parliament remains deadlocked over the way to leave the European Union. While granted a reprieve for now, a disorderly "no deal" Brexit may be enough to tip the scales and send some of the region's economies into recession.