Yardeni Research, a leading market research firm, has raised concerns about the potential for a recession before the end of next year, following the onset of the Israel-Hamas war on Saturday.
Escalating Conflict in the Middle East
According to Yardeni Research analysts, the ongoing conflict in the Middle East has heightened the chances of an economic downturn in the United States. While this is not their base-case outlook, they have raised the odds of a recession by the end of 2024 from 25% to 30%.
Uncertainty Surrounding Ceasefire
Possibility of Broader Conflict and Oil Price Impact
Yardeni Research cautions that the ongoing war could potentially escalate to involve Hezbollah, Iran’s proxy in Lebanon. They further express concerns about potential tightening of sanctions on Iran’s oil exports by the United States. Such tightening could cause oil prices to surge above $100 per barrel and have severe repercussions on the global economy. However, the analysts believe it is more likely that Saudi Arabia would respond by increasing production and exports to prevent oil prices from exceeding $100 per barrel.
Oil Market Update
At present, West Texas Intermediate crude prices are trading slightly lower at around $86 per barrel, according to FactSet data.
As the situation in the Middle East continues to evolve, Yardeni Research emphasizes the need for vigilance and close monitoring of geopolitical developments, as they can have significant implications for global markets and the potential for a recession.
Yardeni’s Concerns Grow: Potential Debt Crisis and Credit Crunch on the Horizon
According to recent notes, Yardeni’s “worry list” has expanded. Alongside the escalating tensions in the Middle East, the analysts are becoming increasingly concerned about a potential debt crisis and are keeping a close eye on the banking industry for any signs of an emerging credit crunch.
Last month, Yardeni raised the probability of a recession to 25% due to their worries about a potential debt crisis associated with the wide deficits of the U.S. federal government. These concerns have also made their way into the financial markets, causing unrest among investors.
Read: Why the ‘abnormally large’ U.S. deficit is alarming for stocks and bonds, according to Yardeni
“The Bond Vigilantes seem to have gathered and formed a group determined to restore law and order in fiscal policy,” they added, referring to the recent surge in long-term Treasury yields.
As of last check, the yield on the 10-year Treasury note (BX:TMUBMUSD10Y) had dropped by 12 basis points, standing at approximately 4.69% on Tuesday morning, as per FactSet data.
“We anticipate that the 10-year Treasury bond yield will eventually stabilize within the Old Normal range of 4.50%-5.00%,” stated the Yardeni analysts. “However, this can only be achieved if inflation continues to decrease, aligning with our predictions.”