The ongoing trade war between the US and China is causing grave concerns among investors following warnings from global central banks and the IMF alike. Now, leading investment banks are starting to sound the alarms.
Over the weekend, US banking giant Goldman Sachs issued a note to clients warning them of the growing risk of a recession in the US. In the note, Goldman said that its forecast for the growth impact from the ongoing trade war has been lifted to a 0.6% drag on GDP from 0.2% prior. Analyst Jan Hatzius explicitly stated:
“Fears that the trade war will trigger a recession are growing,”
GDP Estimates Cut
Goldman also lowered its 4Q GDP estimate by 0,20%. The estimate now sits at 1.8% in light of the ballooning trade war. They noted:
“Overall, we have increased our estimate of the growth impact of the trade war… The drivers of this modest change are that we now include an estimate of the sentiment and uncertainty effects and that ﬁnancial markets have responded notably to recent trade news.”
The note went on to explain that the elevated uncertainty from the trade war would take a toll on business spending until tensions subside, saying:
“Relatedly, the business sentiment effect of increased pessimism about the outlook from trade war news may lead ﬁrms to invest, hire, or produce less.”
While some forecasts have speculated that Trump’s newly proposed tariffs will not come to pass, Goldman believed that the tariffs will be activated. They stated:
“We expect tariffs targeting the remaining $300bn of US imports from China to go into effect,”
BoAML Warn of Recessionary Risks
These comments echo those made by Bank of America Merrill Lynch last week. BoAML also issued a client note warning of rising US recession risks.
In its note, BoAML warned:
“We now have a number of early indicators starting to signal heightened risk of recession. Our official model has the probability of a recession over the next 12 months only pegged at about 20%, but our subjective call based on the slew of data and events leads us to believe it is closer to a 1-in-3 chance.”
The note went on to say:
“Three out of the five economic indicators (auto sales, industrial production, and aggregate hours worked) which track the business cycle closely are near levels consistent at the start of previous recessions. The slowdown in aggregate hours worked is primarily due to a pullback in average weekly hours worked which is now tracking below trend. The bright spot is that initial jobless claims – which are arguably the most reliable early indicator – remain stuck at low levels.”
Impact on The Fed
With an increasing number of forecasters now warning of US recessionary risk factors, expectations for further easing from the Fed are likely to build once more. This is despite the Fed having downplayed the prospect of further easing when it cut rates in July. The CME Group Fed Watch tool shows the market is pricing in a 60% chance of a cut by October and a near 80% chance of a cut by December.
The ongoing rally in USD index which has been framed by a bullish channel over the last twelve months is starting to show signs of a potential reversal. Along with the bearish RSI divergence which has been flagged over the last move higher, the index failed to close above the recent 98.27 resistance and is stalling mid-channel. The recent bearish weekly pin bar at highs is also a red flag. If we do see a move lower, the key level to watch will the bull channel low ahead of important structural support at the 95.37 level. A break of this could see a much deeper, longer-term move in USD.