'The persistency of inflation' could tip us into recession, Citi managing director says

If the U.S. economy slips into a recession sometime in the next 24 months, blame stubbornly high inflation.

“You have to begin to consider the recession risk, which we at Citi put at 50/50 for 2023,” Citi Managing Director Scott Chronert said on Yahoo Finance Live (video above). “And the market responds literally a year ahead of that.”

Asked what would tip the scales toward a recession, Chronert cited “the persistency of inflation.” He then explained the view: “So we’re starting to see some signs of economic activity beginning to plateau or roll over. … So what you begin watching for here is the Fed path. … At the same time, you have to marry that with what’s happening in terms of economic activity and conditions and some of the leading indicators. And so to the degree that the Fed is consistently viewed as a bit behind the curve and more emphatic about addressing the inflation issue, you end up running the risk of an overshoot.”

There are indications that consumer attitudes could be beginning to roll over — a potential precursor to a recession — amid sky high prices for food, gas, and shelter. At the same time, supply chains are nowhere near being back to pre-pandemic efficiency.

“I think we are in a paradigm shift,” Interactive Brokers Senior Economist Jose Torres told Yahoo Finance Live on Monday. “Central banks no longer benefit from cost-effective integrated supply chains. The global outlook is, unfortunately, not positive. Now if the global situation becomes peaceful and China and Russia want to work with the West more, then we have those cost-effective integrated supply chains. We are a long way from neutral, so I do think inflation is here to stay.”

Despite the threat of an inflation-induced recession, Wall Street strategists have been measured in sounding the alarm bell on what that would mean to the broader stock market.

The average year-end price target for the S&P 500 is about 4,743, according to Bloomberg data. That’s 14% or so above the current trading level for the S&P 500.

“We are continuing to bake in a slower economic growth backdrop in 2022-2023 but not a recession,” RBC Capital Markets Head of U.S. Equity Strategy Lori Calvasina wrote in a new note to clients on Monday.

Calvasina trimmed her S&P 500 target to 4,700 from 4,860.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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