The US Federal Reserve could increase interest rates in December despite the very real likelihood of a recession, according to Man FRM.
In a note to investors, Man FRM said recent US economic data was mixed, and while investors “could make a positive case for October’s market moves”, macro data from investment banks indicate that recession remains a risk for the US.
“In October, US consumer data came in below expectations, and unemployment data has flatlined and is starting to creep up,” the company said.
“We have already seen a growing reliance of equities markets on corporate activity to support price levels and a weakening of earnings growth, and the announcement of mega-mergers – AT&T/Time Warner; Monsanto/Bayer – have historically been a good sign that we are late in the economic cycle.”
By December, the time elapsed since the previous recession will be the third longest in the previous 200 years, Man FRM said, but added that the average market participant fears the impacts of a recession more than they should.
“If economic cycles and macro data suggest that a recession at some point is inevitable, then the Fed might tolerate a mild US recession while increasing rates, particularly if inflationary risks emerge,” the company said.
“Under such a scenario, equities could reprice relative to bonds as yields rise, but we believe widespread panic selling is unlikely. October would seem to represent a first step in this direction.”