What Can Credit Markets Tell Us About the Chances of a US Recession?
At a Glance
The primary thesis derived from the Goldman Sachs commentary centers on the assessment that various traditional drivers of US recessions appear less threatening in the current economic environment. Specifically, the report indicates strong financial balances among both households and corporations as a source of resilience, with consumer credit growth plummeting to a four-cycle low and significant reductions in mortgage debt. This strengthens the outlook against past key recession indicators, suggesting that while certain risks, such as those associated with leveraged loans, exist, they are unlikely to precipitate a downturn. Per the full note source, this stance emphasizes that broader economic threats do not seem imminent, setting the stage for sustained market stability in the near term.
Key Takeaways
- 01Financial balances among households and firms exhibit resilience, suggesting a reduced risk of recession.
- 02Consumer credit growth has fallen to a four-cycle low, indicating prudent borrowing behavior.
- 03Certain sectors like leveraged loans present minor risks but are unlikely to jeopardize overall economic stability.
- 04Goldman Sachs' analysis underscores the strength of corporate profitability and debt service capacity.
Full Analysis
What the desk is arguing
The desk posits that the likelihood of a US recession is diminishing, driven by stable financial conditions among households and firms. Per the full note from Goldman Sachs, outstanding mortgage debt has declined significantly, while consumer credit growth is at its lowest in four cycles, indicating that the private sector is not operating beyond its means.
Strong corporate profitability and debt service capacity further bolster this view, suggesting a robust foundation against rising net leverage. While some vulnerabilities persist, particularly in segments like leveraged loans, the overall economy is insulated from these isolated stresses that previously contributed to downturns.
Where it sits in our coverage
The current consensus target for USD/EUR is 1.075, with a range between 1.04 and 1.12. Notable aligned firms include: - jpmorgan: 1.10 - bofa: 1.04
This perspective aligns with jpmorgan's outlook while diverging from bofa, which sees a more cautious approach. The desk's position falls slightly above the lower bound of the consensus range.
How other firms see it
Similarly aligned firms like jpmorgan confirm this optimistic outlook, while bofa adopts a more skeptical stance, indicating potential bearishness on the dollar relative to the euro.
Market players should monitor currency pairs such as USD/EUR and USD/JPY, as movements in these currencies often reflect shifts in economic sentiment shaped by credit market stability and interest rate expectations.
Market Implications
Watch for the USD/EUR pair as a potential stabilizer in the face of prevailing economic uncertainties, particularly given the current target of 1.075. Any shifts around this level could provide further insight into market sentiment regarding the potential for recession, especially in light of recent credit trends.
From the original
A Goldman Sachs Research study of the last 100 years suggests US recessions can be boiled down to five major causes - and several (like industrial and oil supply shocks) look structurally less threatening today. But among those that still bear close watching are the financial bal
Related speeches
4 itemsWhat's Keeping Insurers Up at Night?
The desk observes that insurers are expressing heightened concerns about an impending recession in the U.S.; this sentiment was captured in Goldman Sachs Asset Management's annual insurance survey, where 84% of respondents forecast a recession within the next two years. Such a bearish outlook on economic conditions, particularly when combined with high equity valuations and low bond yields, suggests a challenging environment for capital deployment. Per the full note from Goldman Sachs, this scenario raises significant strategic implications for asset allocation amidst fears of economic contraction.
Half Full: The Case for Remaining Invested in US Equities
The desk contends that despite US equities reaching near-record valuations, continued investment is justified based on favorable economic projections and contextual analysis. Per the full note from Goldman Sachs, broad optimism for the US economy supports this outlook, suggesting that valuations alone do not dictate the necessity for caution. The market, after robust returns since the financial crisis, is now navigating the complexities of high valuations against strong economic underpinnings. Therefore, amidst earnings projections and potential central bank actions, the focus for traders could benefit from heightening risk awareness against a backdrop of continued US growth.
Tax Reform, Bitcoin and the Year Ahead for Financials
The desk interprets Goldman Sachs' recent commentary as a cautiously optimistic view on the financial sector, buoyed by corporate tax reform while recognizing potential disruptions from tech competitors. According to Richard Ramsden of Goldman Sachs, U.S. banks stand to gain from these reforms; however, the ongoing threat from technology firms like PayPal and Square poses significant challenges for traditional banking operations. Per the full note, the regulatory landscape and the impact of cryptocurrencies, particularly Bitcoin, were highlighted as factors to monitor closely as we move further into 2018. As we look ahead, the lack of immediate high-impact calendar events suggests that this thesis may unfold over the medium term without significant noise from economic data releases.
'Peak Momentum' and a New Phase for Asian Stocks
The desk interprets Goldman Sachs' commentary on potential 'peak momentum' in global growth, suggesting a shift in market dynamics that could lead to modest equity returns. Per the full note, while growth might be slowing, Tim Moe identifies enduring investment opportunities in Asia, especially in China. This is particularly relevant for FX traders focused on Asian currencies, as trends in equities often correlate with currency fluctuations. Notably, the implied caution reflects broader themes surrounding market liquidity and geopolitical risks that could impact currency valuations.
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