US Recession More Likely Without Fed Rate Cuts, Says Macquarie

Analysts at Macquarie issued a cautionary note on Wednesday, indicating that without interest rate cuts from the Federal Reserve, the likelihood of a U.S. recession increases significantly. They highlighted concerning trends in the labor market as evidenced by the latest consumer confidence report.

While they do not assert that a recession is imminent, they suggest that absent anticipated Fed rate cuts, the risk of a recession would be notably higher. The analysts pointed to “worrisome” indicators of labor market weakness revealed in the Conference Board’s consumer sentiment report published on Tuesday.

According to the report, the proportion of respondents who believe jobs are plentiful fell to 32.8%, down from 33.4%. Meanwhile, the percentage of those who find jobs hard to get rose to 16.4%. This widening gap closely parallels changes in the unemployment rate, reaching the widest margin since March 2021, when unemployment stood at 6.1%.

The analysts also noted additional indicators such as a decrease in both the hiring rate and the quits rate, which are now at levels last observed from 2015 to 2017, a period characterized by unemployment rates between 4.3% and 4.9%.

They anticipate that these labor market weaknesses will be evident in the upcoming employment report for August, scheduled for release on September 6, which may indicate an uptick in the unemployment rate, potentially reaching 4.5%.

Amid growing concerns regarding the labor market, expectations for aggressive Fed rate cuts have surged, with traders in swap markets pricing in approximately 99 basis points of cuts by the end of the year.

This perspective stands in contrast to the more cautious approach taken by the European Central Bank, which maintains a focus on controlling inflation.

The differing strategies of the two central banks have contributed to recent currency fluctuations, with the euro and pound gaining against the U.S. dollar. However, Macquarie warns that this trend may soon lose momentum due to potential political uncertainties in Europe and the UK.