If the US economy is headed into a recession, risk assets such as crypto and tech equities should buckle up, analysts say.
The New York Federal Reserve’s recession probability model is now predicting a 38% chance that the US will go into a recession in the next 12 months.
“This understates the real probability which, based on +60 years of history, is now close to 100%,” Nicolas Colas, co-founder of DataTrek Research, said.
The New York Fed uses the difference between 3-month and 10-year Treasury yields to determine their figure. Historically, nearly every single time the New York Fed’s model has called for a chance of recession above 30%, a recession was either already underway or occurred within 12 months, Colas noted.
“The economy is entering slowdown mode as final third quarter nonfarm productivity data was revised higher and labor costs were significantly revised lower,” Edward Moya, senior market analyst at Oanda, said. “Yield curve inversion deepens and nears a four-decade low which is clearly setting up this economy for a recession that won’t be a mild one.”
With risk appetite fading, bitcoin and ether continued to trend lower Wednesday, each losing about 1.6% and 3%, respectively. Bitcoin continued to hover below $17,000.
Equities struggled to stay in the green Wednesday as well with the S&P 500 and Nasdaq composite indexes losing 0.2% and 0.5%, respectively.
“Bitcoin has massive resistance at the $17,500 level and that should hold leading up to next week’s FOMC decision,” Moya said. “Long-term crypto bets that are waiting to be placed will require either a bullish fundamental trigger or a capitulation moment that has bitcoin testing a key technical level.”
The Fed is set to release its latest decision next week, and investors will surely want to know how Chair Jerome Powell is thinking about rates in view of a potential economic slowdown.
As of Wednesday, futures markets were pricing in about a 75% probability that the Fed will opt for a 50 basis point rate hike, which would be a mild decrease from its streak of 75 basis point increases, according to data from CME Group.
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