The US can still avoid a recession if its plays its cards right – CIBC

CIBC today indicates that next week it will upwardly revise its forecasts for US economic growth and pencil in an additional Fed hike this year.

That move goes against the current prevailing market thinking that has the Fed stuck on the sidelines for months. Current pricing suggests only an 8% chance of a hike on Nov 1 and about 30% for the Dec 13 meeting.

CIBC said the upcoming forecast will include “an additional Fed rate hike
before this year ends, and a further delay before our forecast
slowdown kicks in” along with an upward forecast to US growth.

Coupled with that will be a boost in Q3 GDP to “nearly 4%” from 2.5% just a month ago. They also estimate only a small chance that Q4 growth is negative.

“We still expect that an outright
recession can be avoided if the central bank plays its cards right,
and starts to ease rates in the latter half of 2024,” CIBC writes.

As for the rate hike call, it appears to have a conditional element.

“if long rates start to edge lower again,
as they could in the absence of a fed funds hike in October, that
could see them hike again before year end,” CIBC writes.

“We’ll risk being a broken record by simply pushing back our call
for a stall in US growth into Q1 of 2024. Some of the leading indicators for such a retreat, including slowing bank lending,
and weaker activity in interest-senstive measures like housing
starts and resales, are still pointing that way, as is the market’s
favourite omen, an inverted yield curve.”

The Canadian bank notes that it won’t be boosting up its BOC forecast for terminal rates, saying that current interest rates are already providing a sufficient headwind to growth.

Looking to next week, CIBC highlights speeches from Williams and Chair Powell for potential signals about how higher long-dated yields will affect rate setting. Next Saturday the FOMC blackout also begins.