Zandi added later, “I set off the alarm bells this weekend in that post, just because once I really sat down and started looking at all the data, I go ‘Oh, gosh! This economy is really struggling to move forward.’ And thus, ‘at the precipice of recession,’ I think, applies.”
So if the economy is fragile, why are investors buying? Because they are expecting the Fed to step in with interest rate cuts to rescue their bets. (Cheaper money generally turns into stronger demand for equities.)
Goldman Sachs is currently predicting there will now be three rate cuts this year: “A weak U.S. labour market report last Friday (August 1) has raised market concerns over the U.S. economic outlook, driving a significant front-end-led rally in U.S. rates. We see room for this repricing to continue, as our baseline expectation remains for the Fed to cut rates three times this year, and two more times in H1 next year, and we see room for market pricing to shift in excess of that,” Tadas Gedminas told clients in a note seen by Fortune.
His colleague Vickie Chang says that the fundamentals—a bad labor market and declining consumer enthusiasm—are essentially being ignored by stock traders today. “The core risk to growth pricing is something that threatens the market’s belief that it can look through current weakness and discount the prospect of recession,” she said in a research note.
So, cuts from the Fed are in the mail, right?
Not so fast. Zandi is gloomy about that, too. President Trump’s tariffs and his restrictive immigration policy “raise inflation and weaken economic growth. So if you’re at the Fed and you have a dual mandate to maintain full employment, economy, and low and stable inflation, that gets pretty difficult. How do you respond to that? And the answer is, you do nothing, and that’s exactly what the Fed’s doing.”
He’s also predicting a bond market sell-off, so … fingers crossed, everybody!
Here’s a snapshot of the action prior to the opening bell in New York:
