Citi said Wednesday that it expects global growth to slow next year and anticipates that the U.S. will slip into a recession during the second half of 2023.
In an investor note, Citi outlined that surging levels of global inflation have hindered growth outlooks as central bankers have more work to do in order to cool rising prices. As a result, the financial institution predicted that global growth will slow from 3% this year to 2% next year. Meanwhile, the firm sees risks "skewed to the downside.”
"The United States is looking comparatively resilient, but we expect the cumulative effects of Fed rate hikes to push the economy into recession by the second half of 2023," Citi stated.
"Financial conditions have tightened appreciably, and some measures of aggregate global activity are showing cracks," Citi said of the current economic situation. "As such, we continue to assess roughly a 50% probability of a more synchronized and severe global downturn."
On Fed policy, Citi projected another 150 basis points of interest rate increases over the next three meetings, taking the central bank's key rate to a level of 4.50-4.75% by early February. From there, the firm thinks the Fed will hold rates steady through the end of 2023.
"This path would be the steepest Fed hiking cycle since Volcker. Even so, we see the risks as skewed toward even higher rates," Citi noted.
Looking at Wall Street's current assumptions about Fed policy, the market is currently pricing in a likelihood that interest rates will push past Citi's current base case.
Current activity suggests a 31% chance that the Fed will have a key rate of 4.5%-4.75% at the end of its February meeting, with a fractional probability of a rate lower than that. Meanwhile, the odds currently stand at 49.4% that the key rate will reach 4.75%-5.0% by that time, with another 18.5% chance of a range around 5.0%-5.25%.
The stock market, as tracked by ETFs like the Vanguard Total Stock Market ETF ( NYSEARCA: VTI ) and the U.S. benchmark tracking S&P 500 funds ( NYSEARCA: SPY ), ( NYSEARCA: VOO ), and ( NYSEARCA: IVV ), has fallen sharply during 2022 in the face of rapidly rising interest rates and the threat of an eventual recession. The S&P 500 ( SP500 ) has dropped about 20% year to date.
Other funds that may be worth analyzing during a time of uncertainty are some more defensive names tied to the energy sector ( XLE ), ( VDE ), Health Care segment ( XLV ) ( VHT ) and Utilities space ( XLU ) ( VPU ).
As global growth concerns grow louder, another potential area of safety is the dividend segment as many dividend-based exchange traded funds continue to outperform the S&P 500 in both October and the broader year-to-date landscape.
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Citi sees U.S. slipping into recession during the second half of 2023