CNBC Daily Open: Consumers might just prevent a U.S. recession

This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

U.S. stocks rebound
Major U.S. indexes rose Tuesday in a tech-fueled rally, shaking off their multiday losing streaks. However, U.S. futures dipped slightly in overnight trading. Asia-Pacific markets traded mixed Wednesday. Australia’s S&P/ASX 200 added around 1% after May’s inflation reading was lower than expected. By contrast, China’s Shanghai Composite lost 0.5%, and the yuan slipped, after an 18.8% year-over-year plunge in China’s industrial profits for the first five months of 2023.

Recession warning
The U.S. will slip into recession in the fourth quarter this year, and will continue languishing in it for 2024, according to HSBC Asset Management. Additionally, the euro zone will join the U.S. in seeing its economy contract next year. The silver lining of this forecast: Inflation will fall quickly, and HSBC expects the Federal Reserve to cut rates by the end of this year.

Higher rates for longer
European Central Bank President Christine Lagarde said inflation in the euro zone is still “too high and is set to remain so for too long.” In May, headline inflation was 6.1% for the region, lower than April’s reading of 7% but still three times the ECB’s target of 2%. Lagarde warned that it’s unlikely the ECB will pause rates, let alone cut them, anytime soon.

The fourth industrial revolution
Generative artificial intelligence isn’t hype — it’s the “fourth industrial revolution playing out,” said Dan Ives, managing director of Wedbush Securities. Ives believes AI will transform the way we live and work — and it’s already ushering in the “start of a new tech bull market.” In a separate but related note, Unity shares jumped over 15% after the company launched a marketplace for artificial intelligence software.

[PRO] Seth Klarman on markets
Legendary investor Seth Klarman of Baupost Group spoke with CNBC Tuesday in an exclusive interview. Two highlights: Klarman pointed out one of the most common mistakes regular investors commit when buying index funds and identified a “hunting ground” for investors looking for opportunities. Watch the full interview here.

Recession, recession, recession. The calls are getting so loud you’d still hear them even if you covered your ears.

Here’s Joseph Little, global chief strategist at HSBC Asset Management: “The coming recession scenario will be more like the early 1990s recession, with our central scenario being a 1-2% drawdown in GDP.”

JPMorgan Chase’s top strategist Marko Kolanovic: “We expect a more challenging backdrop for stocks … given the decelerating economy and a likely recession starting in 4Q23/1Q24.”

Baupost Group Chief Executive Officer Seth Klarman: “The goal of the Fed is to reduce the heat in the economy, and one way to do that is to trigger some kind of recession … so maybe it’s an early 2024 event.”

Yet fresh economic data from the U.S. showed a resilient economy that, with luck, might eventually defy those predictions.

Consumer confidence rose more than anticipated to hit the highest level since January 2022; the proportion of respondents expecting a recession declined four percentage points (though it’s still high at 69.3%).

The housing market, generally an early indicator of a downturn, also showed surprising strength. New home sales in May rose 12.2% from April — economists were expecting a drop of 1.2%. Home prices in April increased 1.3% month over month, according to the Case-Shiller index, a closely watched gauge.

Demand for durable goods, which are typically big purchases like televisions and transportation equipment that require long-term payments, accelerated 1.7% in May. That’s faster than April’s 1.2% increase and far more than the Dow Jones estimate of a 1% decline.

All those data show that the U.S. consumer isn’t yet buckling under higher interest rates and (ostensibly) dimmer economic prospects.

And if Wolfe Research’s Chief Investment Strategist Chris Senyek’s expectation for “the U.S. consumer to be the #1 driver of the economic outlook” proves right, then that strength in consumers might allow the U.S. economy to fend off a recession, despite a chorus of voices predicting one.