In March Goldman Sachs assigned a recession probability to 35% after the collapse of Silicon Valley Bank.
Analysts at the bank have trimmed that to 25%, Citing two main factors:
- “We have become more confident in our baseline estimate that the banking stress will subtract only a modest 0.4 percentage points from real GDP growth this year, as regional bank stock prices have stabilized, deposit outflows have slowed, lending volumes have held up, and lending surveys point to only limited tightening ahead”
- “the tail risk of a disruptive debt ceiling fight has disappeared”
GS’ on their Federal Open Market Committee (FOMC) outlook, say that uncertainty exists on whether Federal Reserve policymakers must start a recession to get inflation back to their 2% objective. The key question is whether the labour market can “rebalance smoothly”.
- expect a rate hike of 25bp most likely in July, not at the June 13-14 meeting
- expect peak target rate range of 5.25% to 5.5%
Then:
- “Subsequently, we see a long pause of about a year, followed by very gradual cuts,”
- “On a probability-weighted basis, we continue to think that the rates market is underpricing the outlook for the funds rate over the next 1 to 2 years.”