Goldman Sachs’ 3 reasons warn of a more severe recession in the U.S., U.K., and Canada

Cites 3 factors:

  • “Currently, across the advanced economies, unit labor cost growth, core inflation, and the expected total increase in the policy rate are generally running at levels similar to the run-up of the typical advanced economy recession,”
  • “Higher measures of economic overheating in the U.S., U.K., and Canada than in Japan and the Euro area suggest that the next recession may be somewhat less shallow in these English-speaking G10 economies.”

Hatzius’ forecasts:

  • risk that “the economy enters a recession in the next year at 30% in the U.S., 40% in the Euro area, and 45% in the UK,”
Goldman Sachs sign

USD/JPY poll – forecasts as high as 140. Bank of Japan direct intervention looks unlikely,

  • median forecast was for 131 in six months’ time, compared with 126.84 in last month’s forecast
  • Seven of 61 respondents projected the yen to be at a weaker level than that six months from now, including four forecasting it to be at 140.

Japan was unlikely to intervene in the FX market to stop it from sliding, 45% of 22 poll respondents said.

  • “The BOJ will probably be forced to abandon the yield curve control policy in the coming months if JPY depreciates further. However, direct intervention looks unlikely,” said Roberto Cobo Garcia, head of FX strategy at BBVA.

Ten of 22 poll respondents said Japan would not intervene.

  • six respondents predicted intervention at the 140
  • four chose 145 as the likely trigger level
  • One selected 150
  • another said 155 or weaker

USD/JPY update:

usdyen 07 July 2022 chart

FOMC minutes response: “unsurprisingly hawkish”

  • FOMC minutes … unsurprisingly hawkish
  • Fed appears set on hiking the policy rate by either 50bps or 75bps at the upcoming meeting later this month
  • a restrictive policy stance was seen as warranted given the strength of inflation and tightness in the labour market
  • the minutes flagged the possibility of an “even more restrictive stance” if elevated inflation pressures were to persist
  • there was no sign in the minutes that the Fed is thinking of wavering from its strategy, even with a growth slowdown in train and equity markets in ‘bear market’ territory … participants “recognized that policy firming could slow the pace of economic growth for a time, but they saw the return of inflation to 2% as critical to achieving maximum employment on a sustained basis.”

Daily USD index:

Daily USD index 07 July 2022
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