Don’t rule out a 2024 US recession

A US recession should not be counted as off the table, according to Pendal head of income strategies, Amy Xie Patrick.

Patrick has stuck by a view expressed at a late November webinar that a while markets might be pricing in a soft landing, she believed there would likely be a US recession in 2024, noting that a lag in the impact of policy tightening has been evident in the slowdown in wages in recent months.

“The most obvious signal is a falling ‘quits rate’, signalling workers are becoming less confident about alternative job prospects,” she said. “In my view, lagged effects will continue to appear in the data next year — and as we all know from history, recessions happen slowly, then suddenly.”

We will likely find a moment in the second half of next year where markets realise disinflation is no longer immaculate and is being caused by recessionary force,” Patrick said.

“When asked about my most non-consensus view, I can’t resist pointing out clear signals that the Fed’s Senior Loan Officer survey has been sending.

“This survey asks US loan officers if they are tightening or loosening lending standards. The data points to US default rates likely hitting double digits by the second half of 2024.”

“Unlike the interest rate charged on borrowings, lending standards refer to the criteria and restrictions placed on borrowers seeking finance. The tighter those standards, the harder it is for marginal borrowers to access funding.

“When small businesses can no longer access funding for every-day business needs, bankruptcies and defaults start to happen. Rising default rates are already evident, yet high-yield credit spreads are still glued to the floor.

“Even if my default rate outlook is overly pessimistic, the risk-reward doesn’t seem to be there for continuing to stretch down the quality ladder for that extra bit of yield. Especially not when considering two-year US government bonds are now yielding almost 5%.”