Goldman Sachs on Monday raised the chance of a recession over the next 12 months after a daily sell-off in stock markets, but the investment bank sees the risk of a severe downturn as “limited.”
The bank raised its one-year recession probability by 10 percentage points to 25 percent, while noting that it expects the Federal Reserve to cut interest rates at each of its next three meetings this year.
“With data generally favorable, no significant financial imbalances, and the Fed’s policy rate at 525, we continue to see limited recession risks. [basis points] “There is little room to cut interest rates to support the economy,” Goldman Sachs said in an analysis.
Markets opened sharply lower on Monday morning after also plummeting on Friday.
The Dow Jones Industrial Average, the main U.S. stock index, was down more than 1,000 points, or 2.67%, as of 10:40 a.m. Monday. The S&P 500 was down more than 167 points, or 3%, and the tech-heavy Nasdaq was down more than 580 points, or 3.5%.
Friday’s initial sell-off was fueled by a weaker-than-expected jobs report from the Labor Department.
The unemployment rate rose to 4.3% in July from 4.1% in June, but that was as payrolls increased by 114,000, below the 175,000 that economists had expected. The number of jobs added to the economy was revised down sharply through April, May and June.
“Salary Increase (114,000) [versus] 168,000 [second quarter] “Growth in payrolls (average) and household payrolls (67,000) was weak. Catch-up hiring in the health care sector accounted for more than half of the payroll growth. We now estimate the underlying trend in payroll growth to be 147,000 per month,” Goldman analysts wrote.
The downward momentum continued over the weekend as overseas investors sold stocks on Monday after the Bank of Japan’s recent interest rate hike made Japanese yen-denominated loans worth less.
The Federal Reserve is widely expected to cut interest rates at its next meeting in an effort to stimulate economic growth.
Goldman said it expects the Fed to cut rates by 0.25 percentage point at each of its next three meetings in September, November and December.
The investment bankers also said they believe wage growth has slowed to “a pace of around 3.5 percent, consistent with 2 percent inflation.”
Average hourly earnings rose 0.2% in July and are up 3.6% over the past year, they noted.
