Goldman Sachs has raised its estimate of the likelihood of a U.S. recession within the next year to 25%, up from the previous 15%. This adjustment is based on recent unemployment data, though the firm still considers the overall risk of a recession to be limited.
The firm’s economists, led by Jan Hatzius, view the U.S. economy as stable. They note that there are no major financial imbalances and believe that the Federal Reserve has sufficient flexibility to lower interest rates if needed.
Goldman Sachs forecasts that the Federal Reserve will reduce rates by 25 basis points in September, November, and December. However, they warn that if August’s employment data is as weak as July’s, a more significant rate cut might be necessary.
They believe the Fed’s current rate is too high and has not adjusted quickly enough. The Fed has focused too much on inflation and kept rates steady in July.
The need to support the economy is now a stronger reason for the Fed to cut rates.
Financial markets are expecting even bigger rate cuts soon. Traders see an 86% chance of a 0.5% cut at the September meeting, up from 11% last week.
Update
Polymarket’s prediction markets indicate that the likelihood of a US recession has surged to 26% overnight, nearly doubling.
Update
JP Morgan has increased its estimate of the likelihood of a U.S. recession by the end of the year from 25% to 35%.
On Wednesday, JPMorgan Chase CEO Jamie Dimon maintained that the probability of a soft landing for the U.S. economy is still around 35% to 40%, suggesting that a recession remains the most likely outcome.
In an interview, Dimon noted that his outlook has not changed since February, when he first indicated that the market was overly optimistic about avoiding a recession.
He highlighted ongoing uncertainties such as geopolitics, housing, deficits, spending, quantitative tightening, and elections as contributing factors that continue to worry markets.
JPMorgan reports that 75% of global carry trades have been unwound, erasing year-to-date returns and reducing profits gained since late 2022.
They observe that the spot component of the global carry basket indicates this large-scale unwinding and caution that the “clock is ticking for the G10 carry.”
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