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UBS warns that the US faces a 60% chance of a recession

The US central bank (Fed) has taken an aggressive stance on inflation with the aim of avoiding a recession. During the Covid lock-downs, the stimulus moves brought liquidity to the markets, but now that liquidity is being removed, the markets are suffering.

Meanwhile, according to the bank’s latest aggregate measure, UBS bank analysts see a greater chance of recession in the US, raising the probability now to 60%. By comparison, economist Pierre Lafourcade and his team at UBS saw a 40% recession probability in June.

In addition, these measures are conducted monthly, aggregating the U.S. Treasury yield curve, the macroeconomic situation, and credit data. The economists also elaborated that the economy is in a “contraction phase,” but they remain optimistic that a full-scale recession will not yet occur.

“The probability of being in a contractionary phase is historically very high-94% in July versus 35% in April-but in the current case, the US team’s modal forecast is that the contraction will not turn into a full-blown recession. Component contributions to the factor over the past few months were mixed in July. Labor and housing data pulled the factor down, but industrial production and household spending actually lagged it.

Investors remain on the defensive:

Bank of America’s bond clients sold their positions in stocks across most sectors during the past few sessions, especially industrial and energy, according to data provided by BofA.

Many outflows were seen by cyclical sectors as investors feared a sharp economic slowdown due to the Fed’s fight against inflation, while defensive sectors saw a lot of inflows, which according to the data didn’t happen until January 2022.

In addition, another point of concern for the markets could be the housing sector, in which sales have slowed considerably. Rising mortgage rates are making things more difficult for home buyers. At the same time, inflation continues to hover at historically high levels, piling on more worries for potential new home buyers.

In short, concerns about a recession in the U.S. and a global slowdown are mounting weekly as new data continues to come out and show a slowdown in various sectors, while hedge funds pile into short positions.

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