Credit Agricole

Could the US economy already be in recession?

The advance Q2 GDP report is set for release later this week, and while the Bloomberg consensus and our own forecast sit in positive territory, other models are tracking a negative print. If so, this would represent a second consecutive contraction, which is sometimes referred to as a “technical recession”.

However, the official arbiter of recessions in the US is the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), which defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”.

In the committee’s definition, there is no mention of two consecutive quarters of negative GDP. Instead, the NBER relies on a variety of monthly indicators including real personal income less transfers, nonfarm payroll employment, real personal consumption expenditures, employment in the household survey, and industrial production.

A closer examination of these measures shows that all of these metrics are above levels typically associated with recession, in some cases significantly so. With the NBER’s usual indicators not consistent with recession at the moment, we believe it is unlikely the NBER will determine that the US was in recession in H122, even if Q2 GDP shows a second consecutive contraction.

To be clear, this analysis is not meant to rule out recession. Economic activity has exhibited a clear slowdown in momentum through Q222 and, with inflation stubbornly elevated and the Fed tightening aggressively, we expect further slowdown into next year, making recession a real possibility. However, if a recession does arrive, we expect that to happen late in the year or into 2023 as opposed to already being here.

ING

USD: Post-FOMC correction possible, but likely short

The dollar enjoyed a corrective rally yesterday, rising mostly against European currencies as market fears about a gas crunch in Europe rose further (more in the EUR section below). Also contributing to the dollar move were some shockwaves sent across equity markets from US earnings jitters, and possible market positioning ahead of today’s FOMC.

We suspect this pre-FOMC dollar rally has reduced the scope for a positive impact on USD today. A dollar correction after the FOMC announcement would not be out of the ordinary after all: when looking at the six hours after previous rate announcements, the DXY index dropped in six of the last eight occasions.

EUR: A grimmer outlook

The euro has come under pressure with other European currencies as Russia is reportedly planning to keep squeezing gas flows into Europe, keeping them at minimal levels as long as the standoff over Ukraine persists. Meanwhile, EU members agreed on emergency plans based on a 15% gas consumption cut – even though some exceptions will be considered.

The message that is being conveyed to markets at the moment is that what used to be a black swan risk has now morphed into a very tangible and constant threat. A complete shutdown of gas supply from Russia to the EU is now looking much more likely, and something that is unequivocally being priced into European assets.

In FX, the euro, Swedish krona and Norwegian krone are looking particularly vulnerable. When it comes to EUR/USD, we could see a small correction higher (to 1.0170-1.0200) thanks to some “sell-the-fact” reaction after the FOMC announcement today, but the downside risks remain significant, and we suspect markets could take advantage of a temporary rebound in the pair to enter bearish EUR positions. A re-testing of parity in the near term still seems a very material risk.