Goldman Sachs Sounds the Alarm on the Eve of Earnings Season
In recent weeks, the market focus has been on US economic indicators, the Federal Reserve, and the US economy.
A mixed round of US stats led the markets to bet on a 25-basis point Fed interest rate hike in February. According to the FedWatchTool, the probability of a 25-basis point February interest rate hike stands at 79.2% versus 40.6% one month ago.
However, Fed monetary policy uncertainty lingers. The US unemployment rate is just 3.5%, well below the Fed’s 5% mandate. While inflation has softened, it remains elevated, suggesting an extended period of interest rate hikes.
Significantly, the latest FOMC meeting minutes removed hopes of a 2023 Fed pivot, with members seeing rates higher for longer. According to the minutes,
“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023.”
The hawkish minutes coincided with the December ISM Manufacturing and Non-Manufacturing PMI numbers that showed the US private sector contracted at the end of the year.
World Bank Sends a Grim Economic Outlook as Indicators Flash Red
Globally, the global economic outlook is no better. This morning, the World Bank published its economic growth forecasts for 2023. It was grim reading, with the World Bank projecting the global economy to decelerate to 1.7% growth in 2023, the third slowest growth rate in almost thirty years. Significantly, the January projection is 1.3 percentage points below the previous forecast.
The report highlights several contributory factors to the gloomy outlook, including synchronous policy tightening to combat inflation, deteriorating financial market conditions, and the continued economic disruptions from the war in Ukraine.
China, the Eurozone, and the US are reportedly experiencing a period of pronounced weakness. The weakness is resulting in a cascade effect, impacting the emerging markets, and developed economies.
The World Bank did not hold back, warning,
“Further negative shocks – such as higher inflation, even tighter policy, financial distress, deeper weakness in major economies, or rising geopolitical tensions – could push the global economy into recession.”
In the FX Empire EUR/USD forecast for 2023, we discussed the threat of a global economic recession, rising geopolitical risk, and social tensions as economic conditions deteriorate.
Unsurprisingly, financial institutions are taking notice and beginning to act.
Goldman Sachs Sounds the Alarm Bell on the Eve of Earnings Season
This morning, news hit the wires of US banking giant Goldman Sachs (GS) beginning a ‘massive round of job cuts.’
According to the report, the bank is tightening its belt in the face of falling profits. Beyond cutting staff, the bank will also review its expenses. The report highlighted that Goldman Sachs CEO David Solomon has repeatedly raised concerns about the economic outlook.
The news comes on the eve of earnings season, with several US banks set to release earnings on Friday, including JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC). Goldman Sachs will release earnings on January 17, along with Morgan Stanley (MS).
While earnings will draw attention, the markets will likely be more sensitive to the earnings outlooks. Plans to tighten the belt and the talk of a global recession would likely overshadow any better-than-expected results. Year-to-date, Goldman Sachs’s share price is up 3.22%.