US recession risk high – corporate defaults
Smith 6/27. Elliot Smith, Correspondent for CNBC International focusing on economics, “A U.S. recession is coming this year, HSBC warns — with Europe to follow in 2024,” CNBC, June 27, 2023. https://www.cnbc.com/2023/06/27/hsbc-global-economies-are-out-of-sync-2024-will-be-a-year-of-contraction.html?utm_content=Main&utm_medium=Social&utm_source=Twitter – gm)
The U.S. will enter a downturn in the fourth quarter, followed by a “year of contraction and a European recession in 2024,” according to HSBC Asset Management.
In its midyear outlook, the British banking giant’s asset manager said recession warnings are “flashing red” for many economies, while fiscal and monetary policies are out of sync with stock and bond markets.
Joseph Little, global chief strategist at HSBC Asset Management, said while some parts of the economy have remained resilient thus far, the balance of risks “points to high recession risk now,” with Europe lagging the U.S. but the macro trajectory generally “aligned.”
“We are already in a mild profit recession, and corporate defaults have started to creep up too,” Little said in the report seen by CNBC.
“The silver lining is that we expect high inflation to moderate relatively quickly. That will create an opportunity for policymakers to cut rates.”
Despite the hawkish tone adopted by central bankers and the apparent stickiness of inflation, particularly at the core level, HSBC Asset Management expects the U.S. Federal Reserve to cut interest rates before the end of 2023, with the European Central Bank and the Bank of England following suit next year.
The Fed paused its monetary tightening cycle at its June meeting, leaving its fed funds rate target range at between 5% and 5.25%, but signaled that two further hikes can be expected this year. Market pricing narrowly anticipates the fed funds rates to be a quarter percentage point higher in December of this year, according to CME Group’s FedWatch tool.
HSBC’s Little acknowledged that central bankers will not be able to cut rates if inflation remains significantly above target — as it is in many major economies — and said it is therefore important that the recession “doesn’t come too early” and cause disinflation.
“The coming recession scenario will be more like the early 1990s recession, with our central scenario being a 1-2% drawdown in GDP,” Little added.
HSBC expects the recession in Western economies to result in a “difficult, choppy outlook for markets” for two reasons.
“First, we have the rapid tightening of financial conditions that’s caused a downturn in the credit cycle. Second, markets do not appear to be pricing a particularly pessimistic view of the world,” Little said.
“We think the incoming news flow over the next six months could be tough to digest for a market that’s pricing a ‘soft landing.’”