Stefano Sciacca

Sun, Sep 15

Stock Watch | How far is a potential US recession?

The Eurozone Bubble

The ECB continues to blow into a dangerous bubble that has been created by injecting money to the system. They decided to cut rates by 10 basis points and start a new purchase program of €20 bn per month. The issue is that the Eurozone states are already being financed at negative rates, meaning that they are paid to borrow. This situation has saved as much as 1 trillion euro in interest expenses. On the other hand, the ECB already launched an all-maturities repurchase program (TLTRO) last March, enlarging its already huge balance sheet to almost 40% of the Eurozone GDP. The ECB is accumulating a disproportionate amount of sovereign and corporate debt from issuers that never had a problem in financing themselves with low rates. This create an enormous bubble.

The circulating excess liquidity is 1.7 trillion euro and injecting more would likely not push households to spend/consume more. What if ultra-low interest rate would rather incentivize for more investments? 

That would slowdown the economy. Let’s not forget about the impact this easing policy will have on European banks. These have already lost more than €23 bn, according to Scope Ratings, and concerns rise as junk-debt and high-yield securities demand increases.

The problem with the Eurozone is not a lack is stimulus, while it is probably an excess of it.


How far is a potential US recession? 

DoubleLine CEO, Jeff Gundlach, sees a 75% chance of a US recession before the 2020 recession. He predicted a 45% chance of recession by the end of the year amid US-China trade war and an inverted yield curve that shows similarities to the 2007 one. Ray Dalio thinks there are 4 factors that will affect the severity of the downturn:

  • Effectiveness of central-bank policies 
  • The wealth gap, which will affect how the next recession will look like socially and politically 
  • The 2020 election 
  • The emergance of China in relation to the US 

He sees 25% chances of recession by 2020. 

America’s factories have been hit not only by the trade war, but also by rising uncertainty, a drop in CAPEX, slowing export markets, a stronger dollar and higher input costs. The August ISM number came out as the first contraction since 2016, driving stock prices and bond yields to tumble. The last time that the US showed two consecutive contracting quarters was in 2016, when the country lost circa 30,000 jobs in the manufacturing sector as a consequence of collapsing oil price. However, none of those quarters saw a drop as bad as the 3.1% slump the US experienced during the Q2 2019. Furthermore, the US added 44,000 jobs in the sector, compared to 170,000 in the same period last year.

To conclude, the fiscal year 2018, started last October, has still one month to go and the US budget deficit hits $1tn of accumulate US Treasuries. According to the latest budget data, in August, the receipts gone up 4% year on year to $228bn, which were annihilated by more than $428bn in outlays. The result is a circa $200 bn deficit, fractionally smaller than the last year $214 bn figure. What concerns the most is the YTD cumulated deficit which surged 19% at $1067bn.


Next week our macro spotlight will be on?



  • Industrial Output – China
  • CPI – Italy 
  • NY Fed Manufacturing - USA 



  • ZEW Economic Sentiment – Germany 
  • Manufacturing Sales – Canada 
  • Home Price Index – Australia 
  • China Price Index – China
  • Industrial Production – USA 



  • CPI – UK 
  • Build Permits – USA 
  • Trade Balance – Japan 
  • Industrial Orders/Sales – Italy 
  • PPI Output – UK 
  • HICP – Eurozone HICP  
  • CPI – Canada 
  • House Starts - USA 



  • Employment – Australia 
  • Retail Sales – UK 
  • BOE Bank Rate – UK 
  • Initial Jobless Claims – USA 
  • Existing Homes Sales - USA 



  • Retail Sales ex-Autos – Canada 
  • Core CPI – Japan 
  • Producers Price – Germany 
  • Consumer Confidence Index Flash - Eurozone 


Chart of the week

Fact of the week 


The ECB reduced the deposit rate to minus 0.5% from minus 0.4%, and said it’ll buy debt from Nov. 1 at a pace of 20 billion euros ($22 billion) a month for as long as necessary to hit its inflation goal.


Quote of the week 

“We still think the probability of recession for the euro area is small, but it’s gone up.”

Mario Draghi, ECB Governor on the likelihood of recession in the Eurozone