Four reasons why the economy can avoid a hard landing: BofA
2024.08.06 07:11
In a note to clients Tuesday, Bank of America analysts identified four key reasons why the economy might steer clear of a hard landing despite recent concerns about a sudden “crack” in the labor market.
This outlook comes amid speculation about an imminent rate cut in September and fears of an economic downturn based on the SAHM rule.
Dovish Fed Reaction: Bank of America highlights a “dovish change in the Fed reaction function,” which has set the stage for a potential rate cut in September. This proactive stance by the Federal Reserve is seen as a mitigating factor against a severe economic downturn.
Rate Cuts and Labor Market Dynamics: While the labor market has shown signs of weakening, leading to near-term rate cuts, Bank of America argues that this does not necessarily spell a hard landing. They acknowledge the “suddenness of the ‘crack’ in the labor market” but suggest that the policy response could stabilize the situation without leading to a severe recession.
Loan Market Resilience: The analysts discuss the potential impact on the loan market, noting that a rate-cutting cycle might “suppress loans’ overall appeal” but would also “diminish the tail risk from defaults.” They believe that if growth concerns don’t dominate, the loan market could avoid significant underperformance, which would otherwise be driven by increasing credit risk.
Investment Grade (IG) Bonds: In a scenario where the economy faces turbulence, BofA says IG bonds are expected to be the “biggest beneficiary” as investors seek safety. The report states, “HY will likely remain moderately impacted,” while IG is poised for gains due to a “flight to quality trade,” especially given its recent underperformance.
Overall, Bank of America analysts remain cautiously optimistic, suggesting that while challenges exist, these four factors provide a buffer against a hard landing for the economy.
