Yardeni Research now sees an increased risk of a recession before the end of next year, after the start of the Israel-Hamas war on Saturday.
“The prospects of a prolonged war in the Middle East heighten the chance of a recession in the U.S.,” Yardeni Research analysts said in a note Tuesday. “That’s not our base-case outlook, but we are raising the odds we see of a recession before year-end 2024 to 30% from 25%.”
A quick ceasefire between Israel and Hamas, as seen in the past, is unlikely as it’s a war between Israel and Iran, in their view.
“For Israel, it is existential. This time, Israel’s goal is to wipe out Hamas, which is Iran’s surrogate in Gaza,” the analysts wrote. “The war is also existential for Iran’s mullahs, who need it to distract the population from discontent over their authoritarian regime by moving forward on their machinations to wipe out Israel.”
Yardeni warned that the war could widen to include Hezbollah, “Iran’s proxy in Lebanon,” and raised the possibility of the U.S. tightening sanctions on Iran’s oil exports.
“The tightening of sanctions on Iran oil could cause oil prices to spike above $100 a barrel, which could trigger a worldwide recession,” the analysts said. “More likely is that Saudi Arabia would increase its production and exports to keep the price of oil below $100 a barrel.”
West Texas Intermediate crude prices
CL00,
were trading down slightly on Tuesday morning at around $86 a barrel, according to FactSet data, at last check.
Yardeni’s “worry list” has grown recently, according to the note. Beyond “the escalation of Middle East hostilities,” the analysts expressed concern over a potential debt crisis while saying they’re watching the banking industry for any signs that “a credit crunch” may be emerging.
Last month Yardeni raised the odds of a recession to 25% as a result of its concern about the potential for a debt crisis tied to U.S. federal government deficits that are too wide. Financial markets are worried about the issue, the analysts said.
Read: Why the ‘abnormally large’ U.S. deficit is a worry ‘big time’ for stocks and bonds, says Yardeni
“The Bond Vigilantes seem to have saddled up and formed a posse of rough riders aiming to bring law and order back to fiscal policy,” they said, pointing to the recent surge in long-term Treasury yields.
The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was trading down 12 basis points on Tuesday morning at around 4.69%, according to FactSet data, at last check.
“We still expect that the 10-year Treasury bond yield will settle around the Old Normal range of 4.50%-5.00%,” the Yardeni analysts said. “That will happen only if inflation continues to moderate, as we’ve been predicting.”
Read the full article here