JPMorgan says the U.S. is probably headed for a recession as economic ‘engines are about to turn off’
A series of banking crises this month headlined by the failure of Silicon Valley Bank has forced analysts from multiple banks, including JPMorgan Chase, to rewrite their recession forecasts from scratch, as months of small victories against inflation and a relatively strong economy were potentially swept away in under two weeks.
Even if the government and the private sector are able to successfully contain contagion from the bank collapses spreading through the economy, the failures may still lead to lasting damage for the U.S. financial system. Some banks are teetering on the edge in Europe and the U.S., while jittery markets and the promise of stricter regulation could lead to a credit crunch—a steep decline in banks’ willingness to lend caused by a lack of funds.
It adds up to an impossible choice the Federal Reserve has to make when officials meet on Wednesday: Slow down the pace of interest rate hikes or plow ahead to bring down resurgent inflation and risk amplifying damage to the economy. But as far as the Fed is concerned, hopes of engineering a soft landing for the economy and avoiding a recession may already be in the rearview mirror.
“The Fed is facing a difficult task on Wednesday, but it is likely already past the point of no return,” JPMorgan strategists led by Marko Kolanovic, the bank’s chief global markets strategist, wrote in a note to clients Monday. “A soft landing now looks unlikely, with the airplane in a tailspin (lack of market confidence) and engines about to turn off (bank lending).”
It is still unclear how far contagion from SVB will spread. New York–based Signature Bank failed days after SVB, requiring sweeping government measures to restore confidence that account holders in both banks would be made whole, but other small-sized and regional banks remain in precarious positions. San Francisco–based First Republic remains at high risk, although larger U.S. banks banded together last week to provide a $30 billion deposit to prop up its finances. Treasury Secretary Janet Yellen also pledged Tuesday that the government was prepared to step in again if issues at other banks “pose the risk of contagion.” But even if depositors are safeguarded, the damage may have already been done.
“Even if central bankers successfully contain contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators,” JPMorgan wrote.
The analysts referred to current challenges as a possible “Minsky moment,” named after the American economist Hyman Minsky, who famously predicted that extended bull markets naturally end in epic and monumental collapses. A Minsky moment happens when the inevitable check comes due and the house of cards finally falls down. JPMorgan analysts wrote our Minsky moment is nearing as the past few weeks alone have seen a number of economic and geopolitical threats to the world, including banking crises on both sides of the Atlantic, China striking a new diplomatic deal with Saudi Arabia and Iran, and Chinese President Xi Jinping’s high-profile trip to Moscow and visit with sanctioned Russian counterpart Vladimir Putin, who was recently issued an international arrest warrant for war crimes committed in Ukraine.
Investors and historians have warned for years that an extended bull market in the U.S. since 2009 would inevitably lead to an economic overcorrection: “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble,” investor and market historian Jeremy Grantham wrote in 2021. More recently, Grantham has been warning of an all-consuming “everything bubble,” which he called “pretty damn big” during an interview this month with economist David Rosenberg.
“‘There are decades where nothing happens; and there are weeks where decades happen,’” JPMorgan analysts wrote, citing a famous Vladimir Lenin quote.
JPMorgan isn’t the only major bank to have downgraded its economic forecasts in recent weeks; Goldman Sachs also told clients last week the banking crisis could deliver a severe blow to U.S. economic growth. And former Treasury Secretary Larry Summers has warned multiple times in recent months even before the banking crisis that the economy could be headed for a “Wile E. Coyote moment,” having already run off a cliff edge but still blissfully unaware of the sudden crash about to happen.
The longest bull market in U.S. history that began in 2009 only ended in 2020 because of the COVID-19 pandemic. The short-lived 2020 recession was quickly replaced by another ferocious bull market in 2021, but after a year of slowing growth, the long-awaited Minsky or Wile E. Coyote moment may have finally arrived.
China’s economy is raising red flags across markets as rebound disappoints
Financial markets have been raising red flags recently about China’s economy, but analysts said Wall Street is missing the big picture.
Growth in the world’s second largest economy accelerated to 4.5% in the first quarter from 2.9% in the fourth quarter following the relaxation of COVID restrictions late last year.
But more recent data have pointed to slowing growth in retail sales as well as drops in home sales, industrial production and fixed-asset investment.
That disappointed investors hoping for a bigger post-COVID rebound and led Wall Street to trim its growth estimates for the full year. Worries about China’s economy have rippled through markets.
Earlier this month, the yuan fell past a psychologically important level of 7 per dollar for the first time this year. The price of copper, once expected to see sizable gains due to high demand from Chinese factories, hit a four-month low in mid-May.
Meanwhile, shares of luxury brands that are reliant on China’s consumer base, have started tumbling on stagnant activity.
Chinese equity markets were not immune to slowing performance, as the CSI 300 index continued to slip this week. At the end of April, declining hopes for added stimulus brought the Shenzhen and Shanghai indices down by $519 billion in one week alone.
The stalling performance prompted Rockefeller International’s Ruchir Sharma to call the rebound narrative a “charade.”
But for one analyst, the growing pessimism around China’s economy could stem more from unrealistically high expectations and Wall Street’s tendency to prioritize immediate metrics over long-term outlooks.
“I feel sorry for these people in some ways, because every time the Chinese release some data, they have to say something about it,” Nicholas Lardy of the Peterson Institute for International Economics told Insider.
Heightened anticipations may be due to China’s response to the 2008 financial crisis, when Beijing infused the economy with massive stimulus and achieved double-digit growth, Pantheon Macroeconomics’ Duncan Wrigley said.
However, it also led to a huge debt hangover that China has worked to resolve for much of the last decade. So while demand is slowing, limiting debt growth is equally prioritized by party leaders, he said.
The country set a more conservative 5% growth target in March, which both analysts see as achievable. Although the country will avoid full-scale stimulus to reach the goal, it has a number of tools to ensure growth keeps ticking upwards.
Despite its aim to limit debt, China could increase the availability of cheap loans to sectors in need, as well as lift the lending quota for the three main policy banks, while allowing them to invest in local projects, Wrigley said.
If this isn’t enough, he noted that the People’s Bank of China could ease financial conditions later in the year, such as decreasing the reserve requirement ratio for banks.
But youth unemployment remains high, while heightened geopolitical risk may deny China’s access to foreign technology.
And private investment, a major source of growth in China, has nearly collapsed in the past 15 months, Lardy said.
This may have to do with stringent regulation of Chinese business, as President Xi Jinping expands the role of the state in the market, dissuading business owners from investing in their firms, he said.
“That’s the one big negative factor that I worry about more than all the other things that we have talked about. Why is private investment so weak?” he said.
Quebec proposes making French mandatory for all economic immigration programs
Quebec Premier Francois Legault has proposed major changes to Quebec’s economic immigration criteria.
Speaking on May 25 with the Minister of Immigration, Francisation and Integration, Christine Frechette and the Minister of the French Language, Jean-François Roberge, Legault says the changes will ensure that nearly 100% of new economic immigrants to Quebec will know French before they arrive in the province by 2026. This is meant to promote Francophone economic immigration in Quebec.
“As we have seen for several years, French is in decline in Quebec,” said Legault. “Since 2018, our government has acted to protect our language, more than other successive governments since the adoption of Bill 101 under the Lévesque government. But if we want to reverse the trend, we must go further. By 2026, our goal is to have almost entirely Francophone economic immigration. We all have a duty, as Quebecers, to speak French, to transmit our culture on a daily basis, and to be proud of it.”
Discover if You Are Eligible for Canadian Immigration
Knowledge of oral French will be required for adults. This is meant to ensure that those who wish to settle in Quebec will be able to communicate in French throughout day-to-day interactions at work and in their communities.
The changes are part of a new permanent immigration program for skilled workers in Quebec. The province says the Skilled Worker Selection Program will “take into account the diverse needs of Quebec.”
Candidates in the program will be evaluated in four categories that have not yet been made clear, but the province says that three of the categories will require that the principal applicant and their accompanying spouse have knowledge of French.
There will also be revisions to existing programs. For example, the work experience requirement will be removed from the Quebec Experience Program for graduate students from a French-language study program.
Family reunification measures include making it mandatory for the guarantor to submit a plan for reception and integration that will support the learning of French for the person they are hosting.
Immigration is a shared responsibility between the federal and provincial governments. Quebec’s agreement is unique from other provinces in that it can select all its economic immigrants. Quebec does not have the authority to select family class sponsorship applicants or those who arrive in Canada as refugees or other humanitarian classes.
For 2023, Quebec has targeted that 65% of newcomers admitted to the province will be economic class.
Increasing immigration numbers in Quebec
The province is also considering raising the number of permanent selection admissions from 50,000 to 60,000 per year by 2027. This is in stark contrast to Legault’s recent comments that there was “no question” of Quebec accepting any rise in the number of newcomers and publicly rejecting the federal Immigration Levels Plan, which has a target of 500,000 permanent residents admitted to Canada each year by the end of 2025.
These changes also follow Quebec’s Immigration Levels Plan for 2023, where it was announced that the province would move away from plans that forecast only the coming year and begin introducing multi-year plans for immigration by 2024.
Why the changes?
Quebec is unique in Canada as it is the only province where French is the official language. The province is fiercely protective of its language, saying it is vital to protecting Quebec’s unique culture and status.
Legault is the leader of the Coalition Avenir Québec (CAQ) and is currently in his second term as Quebec’s premier, having been reelected last October. One of the main pillars of the CAQ party is to protect the French language in Quebec.
Immigration was one of the key issues in the recent election. Throughout his campaign, Legault said that Quebec would allow only 50,000 immigrants per year into the province as it would be difficult to accommodate and integrate more than that into Quebec society. He said that accepting more than that would be “a bit suicidal.”
Regardless, Quebec, like the rest of Canada, is experiencing a labour shortage as the population ages and the birth rate remains low. A report released last March by the Canadian Federation of Independent Business shows that the province could face an annual shortfall of up to nearly 18,000 immigrants, who would be able to fill Quebec’s labour needs.
Lira hits record low, but stocks rise after Erdogan win in Turkey
The Turkish leader won the presidency for a third time after a run-off vote on Sunday.
The Turkish lira has plunged to record lows after the re-election of President Recep Tayyip Erdogan, a sign that currency markets are not confident in the country’s economic future after the longtime leader’s re-election.
The Turkish currency weakened to 20.01 to the dollar on Monday after the high-stakes run-off a day earlier.
But Turkish stocks, on the other hand, rose as Erdogan entered a third decade in power with the benchmark BIST-100 index up 3.5 percent and the banking index rising more than 1 percent.
The lira fell to a record low as the country battles a cost of living crisis and depleted foreign reserves.
On the campaign trail, Erdogan pledged to slash inflation to single digits and boost economic growth, a message he reiterated in his victory speech late on Sunday. But analysts said his economic policies are unorthodox and predicted they will lead to more pain for Turks.
“In our view, Erdogan’s biggest challenge is Turkey’s economy,” Roger Mark, an analyst at the Ninety One investment management firm told the Reuters news agency. “His victory comes against a backdrop of perilous economic imbalances with his heterodox economic model proving increasingly unsustainable”.
Hasnain Malik, head of equity research at Tellimer, an emerging markets research firm, told the agency: “An Erdogan win offers no comfort for any foreign investor.”
“Only the most optimistic would hope that Erdogan now feels sufficiently secure politically to revert to orthodox economic policy,” he said.
Interest rate cuts sought by Erdogan sparked a devaluation of the Turkish lira in late 2021 and sent inflation to a 24-year peak of 85.5 percent last year. The president had argued that higher interest rates cause inflation while central banks around the world were raising rates to reduce price rises.
Turkey’s struggling economy, also reeling after the country’s devastating double earthquakes in February, was a major thorn in Erdogan’s prospect for re-election.
The leader has defended his economic policies, reassuring Turks that investment, production, exports and an eventual current account surplus will drive up Turkey’s gross domestic product.
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