• Point72 revised up fourth-quarter growth forecast to 1.5%
  • Drossos says things could get worse if jobs, spending falter

Investors should brace for turbulence as the US economy slows this year, according to Point72 Asset Management’s Sophia Drossos.

“We could be in for a period of volatility because of the sharp slowdown that we’re projecting in GDP and that could trigger some recession worries,” Drossos, an economist and strategist who has served as the chief dealer at the Federal Reserve Bank of New York, said in a phone interview last week. Economic growth is set to slow as higher-for-longer interest rates dampen spending and the US consumer will take a step back, she said.

Point72 doesn’t expect a recession, and this month revised up its fourth-quarter growth forecast to 1.5%. That’s more optimistic than the 0.7% average estimate of economists according to a Bloomberg News survey. Gross domestic product expanded 4.9% in the period ending September.

Wall Street bulls have been piling into an “everything rally” as a slew of recent economic data — from milder-than-expected prices to weaker retail sales — reassured investors that the Federal Reserve is done hiking interest rates. Bond yields have dropped about 11% since their October highs and stocks rallied, pushing the S&P 500 Index to the highest level since August.

Drossos pointed out that a drop in yields hasn’t really changed the level of lending for commercial, industrial and consumer loans.

Higher rates are dampening sentiment among consumers, whose long-term inflation expectations are now at the highest level since 2011, according to a November reading from the University of Michigan. Rising US credit card delinquencies are also signaling pain for households.

If the labor market cooled materially and consumption deteriorated more than expected, Drossos said her growth forecast could move lower.

And as the Fed’s previous hikes continue to slow the economy, investors will take note, Drossos said. “The US exceptionalism story is evaporating,” she said.

Written by:  @Bloomberg.com

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