Here’s the first Wall Street recession call of the new era of inflation

One of the big questions over the past week is whether to heed the bond market’s apparent warning that the US economy may slip into recession after the Federal Reserve goes into a tightening frenzy.

At least one Wall Street bank now agrees.

“Two shocks in recent months, the war in Ukraine and the build-up of momentum in elevated US and European inflation, have prompted us to revise down our global growth forecast significantly,” say economists at Deutsche Bank. “We are now projecting a US recession and a growth recession in the euro zone in the next two years.”

The concern is that, especially in the US, the underlying drivers of inflation have now broadened, shifting from goods to services. “The psychology of inflation has changed significantly, and while long-term inflation expectations have yet to become unanchored, they are at increasing risk of doing so,” says the call from David Folkerts-Landau, the group’s chief economist, and Peter Hooper, global director of economic research

The Fed will respond by raising rates above 3.5% next summer, with the balance sheet summary adding the equivalent of at least 75 basis points in rate hikes. Deutsche sees the European Central Bank, whose officials have warned rate hikes would hurt the economy, will raise rates by 250 basis points between this September and next December.

Economists acknowledge that the recession call is out of consensus, but they don’t expect that to be the case for long. “Rarely have fundamentals based on historical experience and conventional recession indicators aligned so well to point toward this outcome,” they say.

Check out the S&P 500 forecast.

So what does this mean for the markets? 10-year Treasury yield expected
BX:TMUBMUSD10Y

to reach as high as 3.3%, before falling next spring. As for the stock market, they say the market typically peaks three to six months before the start of a recession, so stocks would correct with “a transient drop in the order of 20% by the summer of 2023.” “. Credit market spreads will also start to widen next spring, and then “more strongly.” The dollar is forecast to lose ground steadily against the euro, with the euro
EURUSD

reaching $1.25 at the end of 2023 and $1.30 a year later.

The buzz

Market day focus will be the release of minutes from the latest Federal Open Market Committee, due at 2 pm ET, which will be key to understanding the central bank’s plan to unwind its massive $9 trillion balance sheet. Agustin Carstens, former head of Mexico’s central bank and general manager of the Bank for International Settlements, said the world may be on the verge of a new era of inflation that will require inflation-adjusted interest rates to rise above – called neutral level.

The United States is expected to announce a new round of sanctions against Russia, including on investments. Treasury Secretary Janet Yellen will testify on Russia on Wednesday before the House Financial Services Committee, saying there will be “enormous economic repercussions for the world,” on food and energy security, as well as on the debt sustainability.

spiritual airlines
SAVE

will be in the spotlight like JetBlue Airways
JBLU,

after the market close, confirmed the New York Times report that was looking to buy the low-cost airlinewhich is trying to merge with Frontier Group
ULCC.

Twitter
TWTR

Shares fell in premarket trading as Elon Musk corrected his filing of his stake with the Securities and Exchange Commission to say he is now an activist investor, rather than a passive one. Musk became a board member after Tesla’s CEO bought more than 9% of the social media service.

Cannabis supplier Tilray Brands
tlry

turned to a profit as revenue rose 23%. He also signed a partnership agreement with Whole Foods for the distribution of powders.

The markets

US stocks had a tough Tuesday after Federal Reserve Governor Lael Brainard’s aggressive speech on the S&P 500
SPX

shedding 1.3%, and US stock futures.
ES00

NQ00

pointed to further weakness.

The yield curve not inverted thanks to a rise in the 10-year Treasury yield
BX:TMUBMUSD10Y,

which was 2.63%.

The best tickers

Here were the most active stock market tickers at 6 am ET.

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