Is the recession risk real? - Kalshi Kit

After last week’s July Jobs Report fell well below expectations (114,000 jobs added vs. 180,000 expected), and unemployment came in high (4.3% actual vs. 4.1% expected), summertime sadness is gripping Wall Street.Specifically, investors are worried that the Fed has held rates too high for too long, and condemned the global economy to a “hard landing,” which is just an obnoxious way of saying recession.On Monday, the Dow dropped over 1,000 points, while both the S&P 500 and the NASDAQ lost more than 3%.Crypto fared even worse, as Bitcoin was down nearly 20% over five days while Ether plummeted by 25%.

Last but not least, the Japanese Nikkei 225 lost more than 12% on Monday, which is its largest one-day fall since Godzilla attacked the island in October of 1987.All of this turmoil comes less than a week after Jerome Powell and the Federal Reserve decided not to cut rates at their July FOMC meeting.

“We want to see more good data,” Powell said after the meeting.Oh yeah? You need more data? Well, take a look at my 401k, Jerome!

Remember: this is not financial advice. It's just the opinion of a guy getting paid to ramble on the Internet while using a pseudonym. So do your own research, and invest at your own risk. The author cannot trade on Kalshi.

On Tuesday, the Nikkei had a 10% recovery, while Dow Jones and S&P Futures were up pre-market, sparking hopes for a quick recovery. But volatility remains high, which means we may be witnessing a dead-cat bounce rather than a meaningful bounce back.Obviously, the Jobs Report was a bad sign. Disappointing corporate earnings and the possibility of a widening war in the Middle East are also adding to investors' fears.But how likely is a recession?Kalshi traders currently see a 17% chance in 2024.

But keep in mind, we’re already in the third quarter of 2024, and a recession, at least by the rules of the market, requires “two consecutive quarters of negative GDP growth.” So, while a recession this year is certainly possible, many traders think 2024 will run out the clock on this market.If you look at the chances of a recession in 2025, traders are much more bullish, with a current market forecast of 46%.

So, while the risk of a recession is real, it seems more likely to hit in 2025 than this year.

As mentioned above, the Federal Reserve declined to cut interest rates in late July.

At the time, many analysts and pundits, including Allianz Chief Economic Advisor Mohamed El-Erian, urged the Fed to cut rates, as other central banks (Bank of England, the European Central Bank, etc.) had already done.

Fed Chairman Powell also repeatedly acknowledged the danger of waiting too long to make cuts.

“If you wait until inflation gets all the way down to 2%, you’ve probably waited too long,” Powell said.

But in the end, the Fed feared acting too early risked reigniting inflation.

Now, as recession fears weigh on Wall Street, some, including Wharton’s Jeremy Siegel, claim the Fed should immediately reverse course with an emergency meeting and rate cut, rather than waiting until the next scheduled FOMC meeting in September.

"I'm calling for a 75 basis point emergency cut in the Fed funds rate, with another 75 basis point cut indicated for next month at the September meeting - and that's minimum," Siegel told CNBC.

Others, like El-Erian, are fearful an emergency cut could end up doing more harm than good by creating a sense of panic.

“If the Fed were to cut in emergency mode when all we’ve had is slightly weak economic data, it would signal something much worse, and that in itself could trigger a self-feeding cycle that would damage the economy and would damage markets,” El-Erian told Fox Business.Will an emergency meeting happen (check out our new "Emergency Meeting" market here)? And if so, will the Fed make an emergency cut?

For the moment, it looks like Kalshi traders agree with El-Erian.

In our new “Fed rate cut before next scheduled meeting?” market, traders price in an emergency rate cut at just 10%.

However, our traders are all but certain a cut is coming at or before the regularly-scheduled September FOMC meeting, with “Yes” contracts currently priced at 95%.

Assuming the Fed does cut at its regularly-scheduled meeting, how much will they cut? Of the economists mentioned above, Siegel is calling for drastic measures.

“The fed funds rate right now should be somewhere between 3.5% and 4%,” he said.

El-Erian is calling for a much more cautious approach.“I wouldn’t have them cut for more than 0.25%,” El-Erian said. “I think you’ve gotta be really careful here that you don’t swing the other way.”

Our markets indicate the Fed will ultimately find a middle ground between Siegel and El-Erian.

Right now, they show a nearly 60% chance that the Fed will cut by more than 0.25% at the September FOMC meeting.

Our markets also show a 95% chance that interest rates will be above 4.75% after the September FOMC meeting, but only a 39% chance that rates will be above 5%.

Last but not least, given the panic gripping Wall Street, how many rate cuts are in store for 2024?

Right now, our traders’ forecast calls for four cuts in 2024, which is impressive given it’s already August, and just two months ago it looked like the Fed would only be making one cut.

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