The US economy may soon be in danger of contracting, according to Wermuth Asset Management.
Fluctuating commercial property values correcting huge stock valuations would drive prices lower.
Inflation accelerated by 3.3% year-on-year in Julymuch lower than the rate of inflation recorded last year.
Declining inflation could turn into deflation in the US, in part because of the risk of a stock and real estate crash, according to Wermuth Asset Management.
Indeed, commercial real estate values are under pressure, while a potentially overvalued stock market could face a swift correction if conditions worsen. The company says that the fall in the prices of these assets will go a long way to causing deflation.
This is contrary to what other economists say, with many warning that inflation is stuck problem It will stay sticky. Prices accelerated 3.3% year-on-year in Julyjust above the 3% price growth in June.
Wermut warned that deflation could be imminent when considering the huge downside risks that await stocks and real estate assets.
Wermuth said the S&P 500 has gained 16% since the start of the year, leaving stocks “dangerously high,” especially when considering the poor outlook for corporate earnings. Companies may struggle to maintain profits as financial conditions remain tight and inflation continues to subside. This may lead to one Worst recession in earnings since 2008Morgan Stanley warned, an event the bank expected to cause Stocks to fall as much as 16%.
Trouble is also brewing commercial real estate market. There is about $1.5 trillion in debt in the sector that will soon reach maturity and will need to be refinanced, but interest rates are higher now, and Banks are holding back on lending. This can result in a load of distressed commercial real estate, It causes the price to collapse by as much as 40%, as estimated by Capital Economics.
Lower inflation will also be driven by slower GDP growth in major global economies, including the United States. The Federal Reserve raised interest rates and aggressively reduced its balance sheet Over the past year to fight inflation.
“Enough is enough. By the middle and end of September, when central banks discuss their next steps, it will be clear that deflation, not inflation, is the main risk,” Wermut warned.
Markets expect the Fed to leave interest rates unchanged at its September policy meeting as central bankers respond to progress on inflation. Investors are pricing in with an 89% chance That the central bank will maintain the level of interest rates in September, with increasing possibilities that the Fed will cut interest rates in the first quarter of 2024.
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