To The Moon

Since the Federal Reserve began a historic storm of rate hikes, "recession" has been the keyword in Wall Street's description of the U.S. economy next year.

In a report released Monday, UBS repeated its warning that the U.S. economy could suffer a hard landing next year:

UBS expects real US GDP to contract by about 1% next year, while unemployment will reach 5.5% in 2024.

With inflation still high in the short term, UBS expects the Fed to raise interest rates by 50 basis points in each of the next two meetings before pausing. Interest rates will be cut in the third quarter of next year.

GDP will grow negatively and unemployment will rise by 2% next year

UBS said the current US growth momentum would gradually weaken in the coming months, and the pressure from high interest rates would cause the economy to begin to contract "severely" at the end of the first quarter or the early second quarter of next year.

UBS's model shows, there is more than a 60% chance that the US economy will enter a recession in September next year.

UBS expects real US GDP to contract by about 1% next year, lasting eight months, making the recession slightly milder than in 1991.

As a barometer of the economic situation, labour market growth is expected to slow sharply in the coming months.

The Bureau of Economic Analysis slashed its salary forecasts for the first and second quarters in September, because it replaced estimates based on non-farm payrolls and average hourly wages with state tax estimates.

This suggests that the non-farm payrolls report may have exaggerated the health of the US labor market this year.

As a result, UBS expects US payrolls to continue to decline in the coming year amid the gloom of recession. By 2024, unemployment will rise by about 2% to a peak of 5.5%.

In the face of recession, the Fed will cut rates by the middle of next year?

At the monetary policy press conference in November, Fed's Powell hinted that he would slow the pace of interest rate hikes. So, UBS expects the Fed to raise interest rates by 50 basis points in December and again in February next year, raising the benchmark federal interest rate range to 4.75% and 5% respectively.

Fearing a recession, the Fed expects to suspend interest rate hikes after a sharp rise in unemployment, keeping the interest rate ceiling at a peak of 5%. Then in the third quarter of next year, the Fed will start to cut interest rates.

The Fed may lower its target range for the federal funds rate to 3.0%- 3.25% by the end of 2023 and 1.0% to 1.25% by early 2024.

In terms of quantitative tightening, the Fed is currently balance sheet runoff at a fairly rapid pace.

UBS said the balance sheet runoff plan faced not only economic weakness, but other "complications" next year. This could cause the Fed to slow sharply or stop runoff around June 2023. If the economy slips into recession, the Fed may end the runoff ahead of time.

The mid-term elections determine the direction of fiscal support

More than halfway through the mid-term elections, though Republicans are currently leading the race to take control of the House of Representatives, in terms of the Senate score, there is little hope of a "full victory" for the Republicans.

If Democrats succeed in retaining control of Congress, UBS said, more meaningful fiscal policy is still possible, especially when it comes to tackling the recession. Of course, this would be subject to higher interest rate risk, as the Fed is likely to remain vigilant to continue fighting inflation.

But if Republicans win control of Congress, there will be no further financial support beyond what has already been passed and the regular budget, including an extension of unemployment insurance. Then,Fiscal expansion wil face many hurdles before the presidential election in November 2024.