Big banks predict recession and Fed pivot in 2023

Big banks predict recession and Fed pivot in 2023
Big banks predict recession and Fed pivot in 2023

Major banks are predicting that an economic downturn is just around the corner.

More than two-thirds of economists at 23 major financial institutions who deal directly with the Federal Reserve are betting that the United States will experience a recession in 2023. Two others predict a recession in 2024.

The companies, known as Master Dealers, are a collection of trading firms and investment banks that include companies such as Barclays PLC, Bank of America Corp.

TD Securities and UBS Group HER

. They cite a number of red flags: Americans are spending their pandemic savings. The housing market is in decline and banks are tightening their lending standards.

“We expect global GDP growth to slow in 2023, driven by recessions in the United States and the eurozone,” BNP Paribas SA economists wrote in the bank’s 2023 outlook, titled “Steering Into Recession ”.

The main culprit is the Federal Reserve, economists say, which has been raising rates for months in an attempt to slow the economy and rein in inflation. Although inflation has recently come down, it is still well above the Fed’s desired target.

The Fed raised rates seven times in 2022, taking its benchmark from a range of 0% to 0.25% to 4.25% to 4.50% currently, a 15-year high. Officials signaled in December that they plan to continue raising rates between 5% and 5.5% in 2023.

Most economists polled by The Wall Street Journal expect the higher rates to push the unemployment rate from 3.7% in November to over 5%, still low by historical standards, but this increase would mean that millions of Americans would lose their jobs.

Most also expect the US economy to contract in 2023.

Although the economy has held up relatively well during the 2022 rate hikes — jobless claims remain weak, for example — economists have said the chilling effects of rising interest rates will be felt. more noticeably in 2023. US interest rates are still well below historical levels, but are the highest since 2008, before the global financial crisis.


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Of course, nearly everyone on Wall Street and Washington got 2022 wrong — from the Fed’s insistence that inflation would be transitory, to top Wall Street analysts predicting an unremarkable year of stock growth. stock and bond prices. The extent to which investors, analysts and economists have been misled has left many looking to the year ahead with a sense of unease.

Still, economists and asset managers point to a number of indicators that have traditionally pointed to recessions: banks have tightened lending standards and demand has weakened to near levels typically associated with recessions . The Conference Board’s collection of leading economic indicators has fallen for nine consecutive months, reaching levels that historically preceded recessions. And the gauges that track overall business activity and the services and manufacturing sectors have fallen to some of the lowest levels since the 2020 Covid-induced recession.

Additionally, US government bonds maturing between three months and two years offer higher yields than bonds maturing in 10, 20 or 30 years. This so-called inverted yield curve is a wake-up call that has occurred before every U.S. recession since World War II.

The excess savings that Americans accumulated at the height of the pandemic fell from about $2.3 trillion to $1.2 trillion, according to Fed data. Deutsche Bank analysts expect that to be completely exhausted by October.

“Consumer demand is slowing and we expect it to slow sharply as excess savings begin to dwindle and consumers become more stressed,” said Brett Ryan, senior US economist at Deutsche Bank. Businesses will also likely have to cut capital spending, Ryan said.

Certainly, the majority of economists who expect the US economy to contract predict that it will be a “shallow” or “mild” recession. They expect the U.S. economy and stock markets to rebound at the end of 2023, thanks in large part to the Fed’s pivot on rate cuts. They largely expect bonds to offer strong returns in 2023, while equities end the year slightly higher.

Most outlooks are for the Fed to raise interest rates in the first quarter, pause in the second, and start cutting rates in the third or fourth quarter.

They expect the Fed pivot to bring heightened volatility to the stock market, but to produce average returns overall. Average outlook targets have the S&P 500 about 5% higher than its current level at the end of 2023. A few are calling for the S&P to fall from its current level by the end of 2023, including Barclays and Societe Generale HER


“The stocks look very rich,” said Steven Abrahams, senior managing director at Amherst Pierpont. “It’s an easy call to allocate equities to bonds.”

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Only five of 23 financial institutions surveyed by the Journal said they expect the US to avoid recession in 2023 and 2024: Credit Suisse Group HER

Goldman Sachs Group Inc.,

HSBC Holdings PLC, JPMorgan Chase & Co. and Morgan Stanley.

“Several historically reliable leading indicators are sending signals of recession, but in our view, these measures are unable to properly assess the risk of recession in the current environment,” wrote Jeremy Schwartz, senior US economist at Credit Suisse, in the bank’s 2023 economic outlook.

But even these relatively optimistic economists predict that the US economy will grow much more slowly than it has for the past 20 years.

They expect growth for the year to slow to around 0.5% on average. The economy grew at an average rate of 2.1% from 2012 to 2021.

Goldman has the most optimistic outlook for 2023, predicting 1% growth in US gross domestic product.

The Treasury’s inverted yield curve is reaching new extreme levels. But paradoxically, this could suggest that investors are both more worried about a recession and less worried. The WSJ’s Dion Rabouin explains. Illustration: David Croc

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