“Our view is that the pessimists will sadly prevail on this occasion,” Henry Allen, a Deutsche Bank research analyst, wrote in a note released soon after Tuesday’s release of the August consumer-price index, which showed inflation spreading more broadly despite falling gasoline prices. One of the biggest reasons is that the full impact of the Federal Reserve’s string of interest rate hikes won’t be felt for a year, or until 2023, Allen said.
In April, Deutsche Bank DB, -3.97%, based in Frankfurt, Germany, became the first major Wall Street bank to predict a U.S. recession, citing inflation psychology that had shifted significantly and long-term expectations that were at risk of coming unanchored. It continued to see downside risks to its own pessimistic outlook that month, and has called itself “the extreme outlier on the street.” In June, Deutsche Bank also said it saw a chance that inflation would fail to decelerate.
To be sure, interest-rate-sensitive sectors like housing are already feeling the effects of Fed rate hikes, with the National Association of Home Builders’ market index plummeting in recent months, and an index of pending sales near one of its lowest levels in more than a decade, Allen wrote. But those effects are expected to become more prominent over the months to come.
Tight labor market The tight U.S. labor market has often been cited by optimists as the biggest reason that the world’s largest economy can avoid a downturn, given the widespread availability of jobs and continued demand for workers. However, Deutsche Bank’s Allen said the “incredibly” tight labor market will make it harder to curb inflation and could even “necessitate more rate hikes.”
Recession indicators are ‘flashing red’ The spread between the 2- and 10-year Treasury yields TMUBMUSD10Y, 3.419%, long seen as a reliable harbinger of a recession, first inverted this year in March and remains deeply negative, at minus 31 basis points on Tuesday after the CPI report.
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