Market Update: U.S. recession outlook and risks

Check out the highlights of this year's second edition of Market Update livestream, having Alejandro Estevez-Breton, our Chief Fixed Income Strategist, and Bernardo Tenreiro Dutra, U.S. Economist at Itaú BBA as guests.

Por Itaú Private Bank

3 minutos de leitura
Imagem ilustrativa do artigo Market Update: U.S. recession outlook and risks
Crédito: Itaú Private Bank

Last Wednesday, February 16, we held our "Market Update" meeting, a monthly livestream about global markets hosted by Marcelo Aagesen, Head of Global Markets, and Niraj Patel, Chief Equities Strategy, both from Itaú Private Bank international.

In this edition, Alejandro Estevez-Breton, Chief Fixed Income Strategist, and Bernardo Tenreiro Dutra, U.S. Economist from Itaú BBA were invited to talk about US recession outlook and risks. Check out the highlights below.

Recession Outlook, U.S. Economy

Global Scenario

Main risks for the global economy:

- The war between Russia and Ukraine, a possible cause of a gas supply problem in Europe, which could create a global recession;

- The pace of China's recovery, following the end of the zero Covid policy, which could impact the scenario if too slow or too fast;

- The levels of inflation, not only in the U.S., but in developed and emerging countries, with central banks reacting and raising interest rates.

These were the risks mapped as indicators of a stronger economic downturn since 2022. Now the first two topics have diminished, the war has stabilized, and the pace of recovery of China's economy is within expectations.

However, the risk of inflation remains.

About a possible conflict between the U.S. and China regarding Taiwan, the expectation is that it will not have a significant impact on the global scenario.

Soft landing vs. hard landing

How will the economy recover? Leaving aside black swans, i.e. improbable events like the one caused by Covid-19, there are two different perspectives on the pace of the U.S. economy recovery: soft landing or hard landing.

In the first case, this means that the Federal Reserve (Fed) will be successful in controlling inflation by slowing activity or even triggering a mild recession.

In the case of a hard landing recovery, controlling inflation would require a bigger drop in activity, with a more significant increase in unemployment, which could even cause a crisis.

There is also a third possible scenario in sight, the ‘no landing’. In this scenario, data would remain very resilient, with no deceleration in inflation. This would mean a further tightening of interest rates before stabilization.

Generally speaking, inflation risks are mapped out and are being increasingly postponed and are now expected for the last quarter of 2023 or even for next year.

Fixed Income x Equities

In the current scenario, riskier assets are doing better. The U.S. Treasury Curve continues to have the recession risk mapped out and is pricing in a soft landing followed by a reacceleration. It is a time when portfolio diversification gains even greater weight.

In the equity market, after a start of the year with more cautious and worried investors, the perspectives are good. The data points to a recovery in consumer spending and stable employment levels.

Companies, and not just Big Techs, are preparing for the slowdown by cutting costs and raising standards, avoiding risks. Layoffs and the advance of artificial intelligence also need to be on the radar, as they impact more cyclical aspects, such as jobs, real estate, among others.

Click here to read an Portuguese version of this article.