A US-Iran geopolitical flare-up, involving military threats and a subsequent ceasefire, has introduced new economic risks, including a permanent fee on ships passing through the Strait of Hormuz.
The conflict is expected to keep energy prices elevated, with Brent crude normalizing around $80/barrel, and push the PCE inflation measure towards 4%, complicating the Federal Reserve's policy decisions.
The Fed is likely to keep interest rates on hold for the next 2-3 meetings, caught between slowing growth and rising inflation, with the next move likely a rate cut but not until late 2024 at the earliest.
The probability of a US recession in the next 12 months is now estimated at 40-50%, as the economy has no margin for error against further shocks, with unemployment claims being the key indicator to watch.
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Concerns Raised
A US recession is a near coin-flip probability (40-50%) in the next 12 months.
Persistent inflation, driven by energy prices and tariffs, is projected to approach 4% (PCE).
Declining real wages will squeeze household budgets and could dampen consumer spending.
The US economy is fragile with 'no margin for error' to absorb further negative shocks.
Long-term deglobalization trends are being accelerated by erratic US foreign policy.
Opportunities Identified
A fragile ceasefire has averted a worst-case military conflict in the Middle East, bringing oil prices down from their peak.
Deficit-financed fiscal stimulus, such as larger tax refunds, is providing a temporary cushion for consumer spending.