AMP chief economist, Dr Shane Oliver, has highlighted the growing risk of a US recession as a major concern, due to its potential to drag down growth and profits in Australia and globally.
In a recent economic and market update, Dr Oliver noted that the US yield curve has continued to invert and pointed out that US business conditions are currently weaker than in other major countries and nearing recessionary levels.
AMP currently has the risk of a recession taking place in America at around 55 per cent.
Dr Oliver suggested that there is now a strong argument for the US Federal Reserve to keep interest rates on hold, as a recession or significant slowdown will lead to much lower inflation.
“On previous occasions when the Fed Funds rate rose above the 10-year bond yield in 1989, 2000, 2006 and 2019, the Fed paused rate hikes knowing that yield curve inversions often precede recessions,” he said.
“To continue hiking too far from here could risk a deep recession which invariably suppresses inflation. So even if the Fed goes a bit further, it’s looking likely we may be nearer the top than market expectations and the Fed’s dot plot for a rise to 5 per cent indicate.”
The bottom line, according to Dr Oliver, is that the short-term risks for investment markets remain high, with volatility potentially set to continue over the coming months.
“But providing any recession is mild, we remain of the view that the combination of improved valuations, central banks easing up on the brakes and anticipation of stronger growth in 2024 will enable share markets to rise on a 12-month view,” he said.
“We are now entering a seasonally strong time of the year for shares — so a playout to watch would be for shares to rally into January, pull back into around February but remain above recent lows and then for the rally to resume.”
However, the AMP chief economist also warned that the lack of a rally during this seasonally strong period would be a “bad sign”.
Looking further ahead, Dr Oliver said that shares are expected to provide reasonable returns over a 12-month horizon as valuations improve, global growth picks up and inflationary pressures ease, allowing central banks to scale back monetary tightening.
