Trade Tensions, Oil Shock Cloud Fed Efforts to Steer Clear of Recession… Investors Remain Terrified of a US Recession

Trade tensions, oil shock cloud Fed efforts to steer clear of recession

It’s been an eventful six weeks for the global economy, complicating the Federal Reserve’s efforts to steer the U.S. economy through a dark global outlook facing increasing uncertainty.

Since the Fed’s July 31 decision to cut rates for the first time in over a decade, the U.S. designated China a currency manipulator, the yield curve inverted for the first time in over 10 years, China and the U.S. ratcheted up their tariffs, and oil prices spiked as geopolitical tensions on the Arabian peninsula flared up.

All eyes are on the Fed’s announcement Wednesday, where Fed Chairman Jay Powell will not only announce its move on rates but release a new round of “dot plots” projecting policymakers’ expectations for where rates could be in the future.

As of Tuesday morning, Fed funds futures contracts were pricing in a 65.8% chance of a 25 basis point cut in its Wednesday announcement, with the other 34.2% of bets on no rate change.

On Wall Street, the expectation for a cut appears stronger, with JPMorgan, Goldman Sachs, Bank of America Merrill Lynch, TD Securities, Rabobank, UBS, Wells Fargo, and Morgan Stanley all predicting a 25 basis point decrease.

“The case for a cut has increased since the July meeting as the data flow in the U.S. has softened and uncertainty remains in the outlook,” Bank of America Merrill Lynch wrote September 13.

Clouding things further: continued criticism from President Donald Trump, who recently pushed Jay Powell to lower rates to “the lowest.”

 

Investors Remain Terrified of a Us Recession: BAML

Recession fears continue to grip Wall Street.

The bad news is that it was not enough to improve the deteriorating annual trend which showed a mere 0.4% YoY growth – the weakest since January 2017…

Just because stocks have enjoyed a bumper September doesn’t mean Wall Street doesn’t remain terrified of a possible U.S. recession within the year.

It simply means investor portfolios aren’t prepared for one.

About 38% of investors surveyed in a new Bank of America Merrill Lynch survey expect a recession over the next year versus 59% who see a recession as unlikely. That’s the highest net recession risk since August 2009.

Interestingly, investors are using the heightened negative backdrop on U.S. trade with China — and now oil demand from Saudi Arabia after a spate of drone attacks on a key production field – to wade back into stocks after a tough September.

US Manufacturing Recession Continues For Second Month In A Row

The good news is that total US industrial production, which also includes output at mines and utilities, increased 0.6%, the most in a year as crude oil extraction bounced back after Hurricane Barry depressed drilling in the Gulf of Mexico a month earlier.

The bad news is that it was not enough to improve the deteriorating annual trend which showed a mere 0.4% YoY growth – the weakest since January 2017…

Source: Bloomberg

Manufacturing production jumped 0.5% MoM (well above the +0.2% expected) but…

But thanks to production of motor vehicles decreasing 1%, the most in four months, the worst news is that manufacturing production remains down on a YoY basis (-0.4% YoY) for the second month in a row…

Source: Bloomberg