Major Banks Brace for a Recession

Major banks in the US are expecting a recession next year and putting aside funds to prepare for it. But the Fed disagrees.

Bankers set aside $5bn while savings rate dwindles

A recent survey of major banking institutions by The Wall Street Journal found that more than two-thirds expect a recession this year. This isn't exactly breaking news, as banks have already started to prepare for at least a dip in the economy. JPMorgan's Jamie Dimon has called for an "economic hurricane", and US banks have put aside as much as $5B during Q3 ahead of an expected recession. What is notable is the degree of agreement that turbulent times are coming, though the majority are also expecting a relatively short and shallow recession.

On the other hand, it's worth pointing out that these same forecasters didn't expect last year to unfold the way it did and had bet on the stock market growing with relatively low inflation. However, they pointed to a series of indicators that suggest trouble, such as the inverted yield curve, business and manufacturing activity falling, and what the banks themselves have inside information on; the increased savings Americans could stock up during the pandemic has dwindled. Deutsche Bank expects the increased savings rate to run out by October.

Rates expected to weigh on Nasdaq, If the Fed is right

On the other hand, the Fed insists that there likely won't be a recession, though Fed Chair Jerome Powell admits that the economy will grow slower. In the latest FOMC minutes, members were adamant that rates would remain high throughout the year. This contrasts with the main banks, who expect the Fed to cut rates, as their prediction of a recession would provide the groundwork for the Fed to ease policy. 

This is a key difference, particularly for tech-heavy Nasdaq. The consensus is that higher rates have weighed on stocks with higher valuations, which has been the main drag on the tech sector. If the Fed were to keep rates high as they promised, then the Nasdaq would likely remain under pressure through the rest of the year, with the additional complication of a slowing economy. If the bankers are correct, then the Fed moving to an easing footing could boost the tech-heavy index. 

There is a third option, however; just two of the surveyed banks forecast the recession to happen in 2024, and by then, inflation would be much lower, increasing the chance the Fed would ease. 

Nasdaq in bear flag after tapping golden pocket

Nasdaq has fallen 36% since its peak at 16755. It has seen some respite after tapping the golden pocket of the leg starting at 6630, but the swing low of 10500 could succumb to pressure on a bearish flag pattern. If so, it opens the door to 9230, which is the height of the flag added to its lower breakout point. Below there lies the 78.6% Fibonacci retracement at 8780, with its breach increasing the chances of a 100% reversion. If the golden pocket holds firm, the flag could turn into a channel, bringing the upper trendline near the 13k handle into focus. In the interim, bulls will have to recapture the 50% Fibonacci at 11680.

Source: Spreadex

Key takeaways

Over two-thirds of major banks expect a recession in 2021, contrary to the Fed, which expects only slower economic growth. Bankers believe the Fed will cut rates in the event of a recession, but the FOMC plans to keep rates high throughout the year. This difference could significantly impact the tech-heavy Nasdaq as higher rates weigh down on the index. However, if the Fed moves to an easing footing, Nasdaq could see a boost, contingent on the additional complication of a slowing economy.