4 Oct

Are Recession Fears Overpowering Trade War Concerns?

WRITTEN BY Anuradha Garg

After taking some time off, recession fears have again started raising their ugly heads. Barclays’ chief US economist Michael Gapen shared his views on the potential slowdown scenario with CNBC. Gapen thinks that one of the factors that will decide if the US economy will contract in the coming 12 months will be the employment situation. The Bureau of Labor Statistics will release the US non-farm payroll data for September today. The last few economic data points for the US economy have clearly pointed to a downtrend.

ISM services PMI at a three-year low

Yesterday, the ISM released its services PMI data, which came in at 52.6. This is lower than economists’ expectations of 55.1. Also, the reading was the worst we’ve seen in the last three years. As per ISM officials, the respondents were concerned about a potential recession given tariffs and rising labor costs. The softer services reading added another concern to the markets’ growing wall of worries.

Last year on October 1, the ISM released the manufacturing PMI data, which came in worst in more than a decade. As per the reading, the manufacturing sector contracted for the second month in a row. The stock markets saw a steep fall after the manufacturing PMI data was released.

Additionally, on October 1 and October 2, the S&P 500 (SPY), the Dow Jones Industrial Average Index (DIA), and the Nasdaq Composite (QQQ) lost 2.9%, 3.5%, and 2.5%, respectively. However, despite softer data for services PMI, markets jumped back up on October 3 as the Fed’s rate cut gave a boost.

Chances of recession rising

As reported by CNBC, Barclays’ Gapen said: “there’s concern prolonged weakness in manufacturing may be spilling over.” On the chances of a recession, he added that “based on the data that we have on hand and understanding how the economy tends to evolve, we would put the number around 25% to 30% chance over say the next four-quarter horizon.”

One thing that still seems to be holding up is consumer spending. Consumer expenditure forms more than two-thirds of the US economic activity. Any strong indication that the growth in spending is slowing could prove disastrous for the markets.

Barclays says recession fears beat trade war concerns

Also, Market Watch reported the key points from Barclays’ client note from October 3. Barclays notes that investors’ concerns have now shifted from trade war fears to a global economic slowdown. Maneesh Deshpande, a US equity strategist and managing director at Barclays, confirmed this sentiment.

He said, “The simultaneous outperformance of the trade-war and early-recession baskets indicates that slowing global growth, not the trade war, is the primary driver of recession concerns.” Trade war concerns are taking a breather currently as the US and China decided to delay the implementation of tariffs. However, the uncertainty remains.

Trade war uncertainty continues

Due to this uncertainty and a possible recession, many US companies are looking to shift their production out of China. For example, Apple (AAPL) is looking to shift up to 30% of iPhone production outside China. Google (GOOG) has already announced that it is moving the production of its flagship Pixel smartphones to Vietnam from China.

However, moving out of China is not the only way to avoid tariffs. Notably, Tesla (TSLA) is taking a different approach. It is building a factory in China, which will produce cars domestically. This will help it avoid tariffs. At the same time, this will reduce the cost of production and logistics.

Global economic slowdown deepening

While trade war might be taking a breather, the economic slowdown isn’t. Moreover, the weakness seems to be broad-based, both in terms of sector and economies. The recent data points to the fact that the US economy’s relative strength might be waning. The Eurozone manufacturing index already hit a seven-year low.

Additionally, the weakness is also bleeding into the services sector. German manufacturing recession is deepening with each new month. China’s economy is already slowing down and won’t be able to sustain the global growth momentum as it had done in the past.

In this grave situation, many experts suggest investors hold a part of their portfolio in gold. The SPDR Gold Shares (GLD) has gained 17% year-to-date. The VanEck Vectors Gold Miners Index (GDX) has multiplied those gains by returning nearly 30% in the same period. You can read Gold Breaches $1,400: What’s the Next Stop? for a detailed discussion of gold’s price drivers.

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