Commentary for March 27

The beginning of 2023 brought optimism that the US would avoid a recession, but this hope was short-lived. Despite the sharp drop in commodity prices, inflation has persisted, and tensions with China have escalated following the US’s shooting down of a spy balloon. The banking sector has also experienced recent turmoil, further exacerbating the situation.

To address these challenges, the Federal Reserve raised rates by 25 basis points last week, although this was fewer than the 50 basis points that had been anticipated a few weeks earlier. However, this hike is expected to further tighten financial conditions due to the stress facing small and midsize lenders, which are significant players in US bank lending.

Fed Reserve Chair Jerome Powell cautioned that stricter lending standards could have an impact equivalent to one or multiple rate hikes. Goldman Sachs concurs, estimating the effect to be 25 to 50 basis points of rate increases. As a result, prominent investors and market indicators are predicting an imminent recession. Bill Gross and Jeff Gundlach, both regarded as “bond kings,” have sounded the alarm by issuing “red alert recession signals.”

Furthermore, even Powell’s preferred bond-market indicator indicates that a recession is likely to occur later this year.

Adding to these concerns is a broader concern about global realignments away from the US dollar, specifically the Saudis’ recent talks with China and Russia. Even CNN is reporting on the global diversification away from the US dollar.