UBS sees 64% probability of US financial system sliding into recession in 2023

UBS now sees a “exhausting touchdown” for the US financial system, with a 64% probability of recession. Given this atmosphere, the agency additionally predicted that the Fed may transfer charges decrease in Q3 2023.

The financial institution stated in a word dated Dec. 5 that it believes an financial correction is on the horizon, with GDP declining roughly 1% and the unemployment price rising to five.5% subsequent yr.

“The contraction could be just like 1990, with much less however nonetheless significant job loss,” UBS stated.

UBS cited a number of indicators as pointing in direction of a tough touchdown, together with elevated spending of family financial savings, rising bank card debt, and a cooling housing market. It famous that shopper spending has risen simply 1.8% over the previous 12 months, whereas layoffs at the moment are approaching 2018-2019 ranges.

UBS additionally believes that inflation is cresting and the non-public consumption expenditures, or PCE, inflation price will fall earlier than the FOMC anticipates. It expects the Fed’s terminal price can be round 5%, with price hikes of fifty bp in December and February earlier than it pauses to the assess the scenario.

UBS added that it expects to see job losses emerge in Q2 2023, adopted by the Fed shifting to cut back charges in Q3.

“With our inflation projections, the FOMC has loads of room to chop, since the actual funds price could be rising and inflation seem headed again to focus on,” UBS stated. “Nevertheless, stickier inflation may complicate issues, and make any downturn extra possible, deeper and extra protracted.”

The S&P 500 (SPY) (SP500) has fallen about 16% for 2022, as rising rates of interest and excessive inflation has put stress on shares. Nevertheless, the index has seen an upswing these days, rising greater than 5% prior to now month, partially resulting from hope of a mushy touchdown.

For a extra optimistic view of the market, see why Searching for Alpha contributor David H. Lerner thinks the S&P 500 may rally to 4,300 from the present ranges round 4,000.