Need to Know: Here’s the latest Wall Street recession forecast — it’s a coin flip

This isn’t really a market built for rallies. This quarter, there has only been one back-to-back daily gain of at least 2% for the S&P 500, and the early action in U.S. stock futures suggests there’s no worry of a second. The latest global economic outlook from Citigroup tells the story, as the Wall Street bank cut its global forecast for both 2022 and 2023. The reductions weren’t terrible — a tenth in 2022, two-tenths in 2023 — but the commentary was dark.

“A series of severe supply shocks continues to rip through the global economy. As the year began, we were hopeful that this narrative would be shifting, but the headwinds instead seem to have become more intense and debilitating,” said analysts led by Nathan Sheets, the bank’s global chief economist. China’s COVID-19 lockdowns, the Russia-Ukraine war, and lasting supply-chain tensions were blamed, to which central bank rate increases and a slowdown in consumer appetite for goods are now added on top. “We judge that the aggregate probability associated with the various manifestations of recession is now approaching 50%,” they said.
Area

2021 GDP growth

2022 GDP growth

2023 GDP growth

Chg in 2022

Chg in 2023

Global

5.8%

3%

2.8%

-0.1

-0.2

U.S.

5.7%

2.3%

1.7%

-0.3

-0.4

China

8.1%

3.9%

4.8%

-0.3

Eurozone

5.3%

2.5%

1.9%

0.1

-0.5%

Source: Citi

So what would a recession look like? They gave three possibilities. One, a “garden variety” recession. That means unemployment rises by “several” percentage points, growth would have a “couple of distinctly weak quarters,” but inflation would come down. The Citi team said most market participants lean toward this view. (And even the more pessimistic assessments of Deutsche Bank and Nomura could be classified this way.) The second is a more painful taming of inflation. “With headline inflation running above 8% in the United States, the euro area, and the United Kingdom, such risks remain on the table. Alternatively, the global economy, which hasn’t seen a hiking cycle of this intensity for a generation, may yet show greater sensitivity to higher rates than central banks expect and this, in turn, could trigger a more sustained downturn,” they said. The third is stagflation, where growth falls off and inflation continues to rage. The Citi team assigned a “relatively low” probability to this outcome. “While the current episode is challenging, the upsurge in inflation is a relatively recent occurrence and longer-term inflation expectations have remained anchored at much lower levels. Thus, our working hypothesis is that inflation would fall as recessionary conditions take hold,” they said.The buzz Federal Reserve Chair Jerome Powell will be testifying on the central bank’s monetary policy outlook, just a week removed from a hike of 75 basis points. “He will be pressed as usual from the right to explain why inflation still has not been tamed and simultaneously from the left to explain if they are putting the recovery at undue risks in order to achieve their goal. That being said, we doubt the Chair will give us too much new information on top of the June FOMC [Federal Open Market Committee] meeting, and is likely to keep any forward guidance fairly limited and conditional to data,” said strategists at NatWest. Richmond Fed President Thomas Barkin will be talking for the second straight day, as will Chicago Fed President Charles Evans and Philadelphia Fed President Patrick Harker. President Joe Biden called for a three-month suspension of gas and diesel taxes. It is up to Congress to decide. Germany, meanwhile, is preparing to declare a natural-gas emergency, according to reports. Uber
UBER,
-0.23%
is bringing back ride-sharing in some U.S. cities. A powerful earthquake in Afghanistan has left at least 920 people dead.The market

U.S. stock futures
ES00,
-1.29%

NQ00,
-1.44%
were sharply lower, with the Dow contract
YM00,
-1.13%
losing over 400 points. Crude-oil futures
CL.1,
-4.73%
dropped sharply, while the yield on the 10-year Treasury
TMUBMUSD10Y,
3.207%
slipped to 3.21%.Top tickers Here were the most active stock-market tickers as of 6 a.m. Eastern.
Ticker

Security name

TSLA,
9.35%

Tesla

GME,
3.80%

GameStop

AMC,
-0.24%

AMC Entertainment

NIO,
9.10%

NIO

REV,
62.47%

Revlon

AAPL,
3.28%

Apple

TWTR,
2.99%

Twitter

AMZN,
2.32%

Amazon.com

MULN,
15.15%

Mullen Automotive

BABA,
4.06%

Alibaba

Random reads Actor Martin Sheen says he regrets changing his name, which is still Ramon Estévez legally. For almost everyone, vitamins are a waste. Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern. Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch writers.

                  

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