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Nearly half of all investors expect a ‘no landing’ scenario for the economy where inflation remains but there’s no recession, Deutsche Bank survey shows

Just a year ago, most investment banks and Wall Street investors were forecasting a U.S. recession due to the impact of persistent inflation and higher interest rates. Some 65% of economists polled by Bloomberg in March 2023 were convinced the U.S. economy was headed for a serious downturn within 12 months. But with U.S. consumers and businesses proving their resilience over the past year, Wall Street’s top minds have mostly abandoned their recession predictions. Even what was long considered to be the obvious alternative to a recession—a “soft landing” in which inflation fades, but economic growth is weak—is increasingly in doubt.

Instead, 45% of investors now believe the U.S. economy is headed for a “no landing” scenario where inflation sticks slightly above the Federal Reserve’s 2% target and economic growth remains robust, according to Deutsche Bank’s March Global Markets Survey. Some 38% of respondents to Deutsche Bank’s survey still expect a “soft landing,” but just 17% expect a recession or “hard landing”—a considerable shift from how economists felt just a year ago.

The news comes after Fed Chair Jerome Powell brushed off two hotter-than-expected consumer price index reports in January and February that had some investors concerned about the threat of persistent inflation and a more hawkish Fed. Powell told reporters at a March 20 press conference that the hot inflation reports “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2%.”

Deutsche Bank’s global head of economics and thematics research, Jim Reid, described many investors’ new “no landing” outlook after the Fed chair’s comments.

“So, you could say [it’s] an implied Goldilocks ‘no landing’ for now with the economy running hot but with central banks not leaning against it and the markets quite liking their porridge on the warmer side for now,” he wrote in an email to clients Monday.

Reid argued that only “time will tell” if investors are being overly optimistic about what the “no landing” scenario means for markets, but he outlined why he believes many are bullish.

Basically, investors are forecasting slightly above target inflation, which is typically bad for stocks because it signals higher interest rates—or at least fewer rate cuts than previously forecast. But this time, with the Fed brushing off recent hot inflation reports and economic growth proving resilient, we could be stuck in a Goldilocks zone in the near term, according to Reid. The Wall Street veteran noted U.S. stocks had their best week of 2024 after Powell’s comments last week because the Fed seemed “very confident of their ability to cut rates in June even with recent elevated inflation prints.”

Another reason that markets are performing so well even as investors raise their inflation forecasts could be their faith in the Fed’s willingness to ignore minor increases in consumer prices moving forward, too. Reid noted that 47% of survey respondents believe “central banks should tolerate an extended inflation overshoot.” 

For now, it seems investors are more worried about inflation than a recession, and they don’t seem all that concerned about an aggressive Fed coming in to wreck the party if inflation does return. As a result, only 13% of respondents to Deutsche Bank’s survey said they expect a U.S. recession this year, down from 59% just three months ago.

Still, in a sign that 2024 really is the year of economic uncertainty, many experts are struggling to forecast the future of the U.S. economy. Some 19% of respondents said they “don’t know” when the next U.S. recession will occur, up from just 3% a year ago.

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