The first Wall Street bank to make a recession call now expects a narrow landing

The bond market looks ready to settle down a bit for Tuesday as more forecasters shift to the likelihood of the first U.S. rate cut coming in summer. Another wobbly stock day is building though as investors try to adapt to this new line of thinking.

It’s thanks to recent blowout jobs and growth data, and more caution from Fed Chairman Jerome Powell over the weekend, that those heady rate cut forecasts have been walked back.

The pessimists might be in for a rough ride this year, based on our call of the day from Deutsche Bank, where strategists say they are no longer expecting a mild recession in the first half of the year.

The bank was one of the first to call for a slowdown back in April 2022, when its economists predicted a U.S. recession within two years.

Fast forward and Deutsche Bank now expects 2024 growth at a “solid 1.9%” (fourth quarter to fourth quarter) rate, with the first Fed rate cut coming in June, but with a total of just 100 basis points.

“When we first adopted a mild recession as our baseline forecast, a key element was that, with an economy far from the Fed’s objectives, the history of central bank-induced disinflations showed the path to a soft landing was narrow if not unprecedented. We now think the economy will land on this narrow path and that a recession will be averted with limited
cost in the labor market,” said a team led by Matthew Luzzetti, chief U.S. economist.

They say the U.S. economy performed as well as hoped for in 2023, with the jobs market holding up and core PCE (personal consumption expenditures) inflation falling below 2% annualized in the second half of the year.

“We see virtuous dynamics at play that could extend these positive developments, including an easing of financial conditions that has trimmed downside risks to growth,” they said.

Luzzetti and co. note the pace of credit condition tightening “has eased noticeably” and financial conditions have grown more supportive. “Households have weathered these conditions and the return of student debt payments and sentiment has rebounded as inflation declined, real income growth picked up, and risk assets remain buoyant.”

The strength of consumer spending has been “surprising,” notes Deutsche Bank economists, who expected goods spending would revert to a pre-COVID trend eventually. Instead that higher expenditure on goods seems to be “the new normal,” they say.

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What are the risks to their new prognosis? The possibility of “greater pass through” from prior Fed tightening and increased geopolitical risks.

“Conversely, we see reasonable prospects that growth continues to surprise to the upside, particularly as financial conditions have eased and with the potential for stronger productivity to continue to provide a boost,” said the Deutsche Bank economists.

Note, Deutsche Bank’s year-end S&P 500 forecast of 5,100 is among the highest on Wall Street, and it included their expectation for a mild short recession. Time to lift that view?

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