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The investment chiefs of two of the world’s largest asset managers say the risk of a U.S. recession is rising, while government officials and a growing number of investors believe the Federal Reserve’s interest rate hikes will not cause significant damage to the economy.
The U.S. economy largely looks resilient in the face of a sharp tightening of monetary policy by the Federal Reserve. But senior fund managers at BlackRock and Credit Agricole told the Financial Times that cracks are now emerging, particularly in the labor market.
“The likelihood that we’re going to be in a recession is very high,” said Vincent Mortier, chief investment officer at Amundi, which manages $2.1 trillion in assets. “The question is how deep and how long . . . We are more concerned about the dynamics in the United States than the consensus.” He added that he expected the economic contraction to occur by the end of this year or early next year.
Rick Rieder, chief investment officer of global fixed income at BlackRock, which manages $9.4 trillion in assets, said he has become more pessimistic about U.S. economic conditions in recent weeks. While he believes the U.S. will avoid a severe recession, he said a slowdown has already begun.
“We’re very enthusiastic about the economy. But the irony is that right now, when I think people are getting over the recession . . . now I actually think we’re seeing some clear signs of a slowdown,” Reed said. “I don’t think you can offset the impact of a recession.”
Both are now “overweight” U.S. government bonds – meaning they hold larger positions than their benchmarks indicate – on the belief that the Fed may be done raising rates and that Treasuries will perform well during periods of economic weakness. The two also expect the dollar to fall.
Their warnings come as broader markets look toward a “soft landing,” in which the Fed manages to lower inflation without tipping the economy into recession. Treasury Secretary Janet Yellen said over the weekend that she was increasingly confident about the possibility of a soft landing.
Investment bank Goldman Sachs earlier this month lowered the likelihood that the United States will begin to fall into recession in the next 12 months. A Bank of America survey of global fund managers released on Tuesday found that about three-quarters of respondents expect a soft landing or no recession at all for the global economy, up from 68% in June.
Futures markets are beginning to reflect investors’ more optimistic expectations. Earlier this year, traders bet on a sharp rate cut in 2023, anticipating that the Federal Reserve would be forced to ease monetary policy in the face of a recession. In recent months, those expected cuts have been largely pushed back to the middle of next year.
Both Motier and Reed pointed to the recent tightening of the labor market as evidence of a slowdown. The unemployment rate rose to 3.8% in August, higher than economists expected and up from 3.5% in July. While the number of new jobs was higher than expected, the total number of jobs in the first two months was revised down.
“This is the first time there’s been significant slack in the workforce,” Reed said. Reed said relatively high Treasury yields look attractive as further rate hikes become less likely.
“Now the Fed is very close, if not quite there… I think taking on more interest rate risk makes you feel a lot better,” he said.
Motier said a weak job market would weaken consumer demand, putting pressure on corporate profit margins as companies lower prices to compete for market share.
“The American consumer is exhausted,” he said.
At the same time, he believes corporate balance sheets will become more stretched as companies deplete their cash reserves and need to refinance at higher rates. “The refinancing wall is coming,” he added. Motier also pointed out that the high level of U.S. government debt limits the ability of U.S. authorities to increase support for the economy.
Amundi is shorting the U.S. dollar, although Mortier acknowledged it is a “tricky” bet because the U.S. dollar is a safe-haven asset that could benefit during market shocks.
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