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Investment chiefs at two of the world’s largest asset managers have warned that the risk of a US recession is rising, even as government officials and a growing number of investors believe the Federal Reserve’s interest rate rises will not significantly damage the economy.
Top fund managers at BlackRock and Amundi told the Financial Times that while the US economy has shown resilience in the face of aggressive monetary tightening by the Fed, cracks are now appearing, particularly in the labor market.
“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 about the dynamics in the US than the consensus,” he added, expecting the contraction to occur 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, expressed increased pessimism about the state of the US economy in recent weeks. While he believed the country would avoid a severe recession, he acknowledged that 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 asset managers are now “overweight” US government bonds, as they anticipate that the Fed may have finished raising rates and that Treasuries will perform well during periods of economic weakness. They also anticipate a fall in the value of the dollar.
These warnings come despite the broader market’s expectation of a “soft landing” in which the Fed successfully reduces inflation without causing a recession. Treasury Secretary Janet Yellen expressed increasing confidence in the possibility of a soft landing.
Goldman Sachs recently lowered the probability of a US recession starting in the next 12 months. A Bank of America survey found that about three-quarters of global fund managers expected a soft landing or no downturn at all for the global economy.
Both Mortier and Rieder pointed to a recent labor market crunch as evidence of a slowdown. While the number of jobs added in August was higher than expected, unemployment rose to 3.8%, and totals for the previous two months were revised lower.
“For the first time, there is some tangible slack in the labor force,” said Rieder. With further rate rises becoming increasingly unlikely, Rieder finds relatively high Treasury yields attractive.
Mortier stated that a weaker job market would decrease consumer demand, leading to pressure on corporate margins as companies compete for market share by lowering prices. “The US consumer is exhausted,” he commented.
Additionally, Mortier expects corporate balance sheets to become more strained as companies deplete their cash reserves and need to refinance at higher interest rates. “There is a wall of refinancing coming,” he added.
Mortier also highlighted the high level of US government debt, which limits authorities’ ability to provide further support for the economy.
Amundi is shorting the dollar, although Mortier acknowledged that it is a “tricky” bet given that the currency is a safe haven asset that could benefit during market shocks.
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