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The risk of a US recession is rising, say investment chiefs at two of the world’s largest asset managers, in contrast to government officials and a growing number of investors who believe the Federal Reserve’s interest rate rises will not damage the economy significantly.
The US economy has largely looked resilient in the face of aggressive monetary tightening by the Fed. But cracks were now appearing, notably in the labour market, top fund managers at BlackRock and Amundi told the Financial Times.
“The probability of a recession for us is very high,” said Vincent Mortier, chief investment officer at Amundi, which manages $2.1tn. “The question mark is how deep and how long . . . We are much more concerned by the dynamics in the US than the consensus,” he said, adding that he expected the contraction to come at the end of this year or early next year.
Rick Rieder, chief investment officer of global fixed income at BlackRock, which manages $9.4tn, said that he had become more pessimistic about the state of the American economy in recent weeks. While he thought the US would avoid a severe recession, he said a slowdown had already begun.
“We had been pretty enthusiastic about the economy. But now, ironically, when I think people have written off a recession . . . now I actually think we are seeing some tangible signs of slowdown,” said Rieder. “I don’t think you can write off a recession.”
Both are now “overweight” US government bonds — meaning they hold larger positions than their benchmarks would suggest — in the belief that the Fed may already be done raising rates and that Treasuries would perform well during a period of economic weakness. Both also expect the dollar to fall.
Their warnings come even as the broader market is expecting a “soft landing”, in which the Fed manages to bring down inflation without sending the economy into a recession. Treasury secretary Janet Yellen said at the weekend she was increasingly confident that a soft landing was possible.
Investment bank Goldman Sachs earlier this month cut the probability of a US recession starting in the next 12 months. A Bank of America survey of global fund managers, published on Tuesday, found that about three-quarters of respondents expected either a soft landing or no downturn at all for the global economy, up from 68 per cent in June.
The futures market is starting to reflect investors’ more bullish expectations. Earlier this year, traders were betting on big cuts in interest rates in 2023, expecting the Fed would be forced to loosen monetary policy in the face of a recession. Those expected cuts have in recent months largely been pushed back until the middle of next year.
Both Mortier and Rieder pointed to a recent crunch in the labour market as evidence of a slowdown. Unemployment rose to 3.8 per cent in August, higher than economists’ estimates and above the July rate of 3.5 per cent. While the number of jobs added was higher than forecast, totals for the previous two months were revised lower.
“For the first time, there is some tangible slack in the labour force,” said Rieder. With further rate rises looking increasingly unlikely, Rieder said the relatively high Treasury yields on offer looked attractive.
“Now that the Fed is, if not entirely finished, pretty darn close to it . . . I think you can feel a whole lot better about taking on a bit more interest rate exposure,” he said.
Mortier said a weaker jobs market would sap consumer demand, putting pressure on corporate margins as companies lowered prices to compete for market share.
“The US consumer is exhausted,” he said.
Meanwhile, he thought corporate balance sheets would become more stretched as companies depleted their cash reserves and needed to refinance at higher interest rates. “There is a wall of refinancing coming,” he added. Mortier also pointed to the high level of US government debt, which limited the ability for US authorities to increase support for the economy.
Amundi is shorting the dollar, although Mortier admitted it was a “tricky” bet given that the currency was a haven asset that could benefit during market shocks.