Is the U.S. heading toward a recession? Plus: Gaming as the pathway to the metaverse

[Goldman Sachs]( [BRIEFINGS] March 17, 2022 Fed Hikes Rates for the First Time Since 2018 The Federal Reserve hiked its benchmark funds rate for the first time since the pandemic started and “delivered a consistently hawkish message at its March meeting,” according to Goldman Sachs Research economists. Fed Chair Jerome Powell reinforced that message by acknowledging the seriousness of the jump in inflation in the U.S. and emphasizing the strength of the economy and the job market — suggesting it would take a lot to convince the central bank to change its trajectory. The Fed is poised to raise its funds rate target seven times this year, according to the median projection from the policy committee (up from the three hikes that were projected at the December meeting). That’s in line with the forecast from our economists before the Fed wrapped up its meeting on Wednesday. Goldman Sachs Research economists expect the Fed to start reducing its balance sheet at its next meeting in May (a month earlier than previously anticipated). They are forecasting the pace of reduction in those holdings will be about twice as fast as the last time it shrank its balance sheet. They still see a meaningful chance of policymakers hiking rates by 50 basis points at a meeting at some point, but their base case remains seven increases this year of 25 basis points each and another four hikes in 2023, bringing the funds rate to 2.75% to 3%. Is a U.S. Recession on the Horizon? Concern about a U.S. recession is growing. Stock market investors are recalibrating their expectations as soaring commodity prices, reduced fiscal spending and rising interest rates threaten the economic expansion. Goldman Sachs Research forecasts the S&P 500 Index of large U.S. companies will end the year at 4700 (the previous forecast was 4900), which would be a gain of about 12% from today’s level. The decline in the S&P 500 in recent weeks suggests about a 40% likelihood of U.S. recession, which would lead to much lower valuations and earnings, according to Goldman Sachs Research. Separately, our economists estimate there’s a 20% to 35% chance of a U.S. downturn, which is roughly in line with models based on U.S. Treasury yields. The S&P 500 has dropped about 24% from peak-to-trough around past recessions (based on the median). But when the U.S. economy avoids a sustained contraction after a 10% market correction, the index has returned 15% over the next 12 months. SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Is%20a%20U.S.%20Recession%20on%20the%20Horizon%3F&body=) The Invasion of Ukraine is Accelerating the Supercycle in Commodities As the war between Russia and Ukraine escalates, global commodity markets are going through the most upheaval since the 1973 oil embargo on the U.S. But this time the energy crisis is most acute in Europe, which relies more heavily on Russian exports. And the shock isn’t confined to one commodity. Russia is the second largest commodity producer in the world (behind the U.S.), and the repercussions of its invasion seem to have changed global supply chains overnight. We sat down with Goldman Sachs’ Global Head of Commodity Research Jeff Currie for his view on global commodities and the impact on markets. It’s around three weeks since Russia invaded Ukraine. Can you summarize the impact this has had on global commodity markets? Jeff Currie: This is the biggest upheaval for commodity markets since 1973. But the comparison ends there. Other than this being a Europe-centered shock, the other key way this crisis is different from the 1973 oil embargo is that this isn’t just a shock to oil supply. It’s a shock to every single commodity: grains, oil, gas, metals, palladium, titanium and neon. The list goes on. We have never seen anything like this before. Another big difference is that 1973 was a seller-boycott. This is a buyer boycott. Apart from the actual war, you also have an economic war in the sense that you have a decoupling between Russia and the West. The actual physical decoupling — which will be seen in the commodity space — hasn’t even really started yet. We have seen the boycotts but the actual transition to do this is going to be a very painful process and difficult to physically achieve. In addition to this physical decoupling, the financial decoupling is starting to impact commodity markets, too. There has been a sharp drop in the prices of many emerging market and Russia-related assets, leaving investors facing large margin calls. To fund these, they must take profit on the only positions in the black: commodities. This has led to a fall in total interest in the space, as well as a fall in prices — a clear sign of de-risking unconnected to fundamentals. Such profit taking only enhances the volatility now present in commodity markets. To learn about the war's impact on each commodity and the long-term outlook, [read the full interview here](. [Read more]( [Read more Briefly Q&As]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=The%20Invasion%20of%20Ukraine%20is%20Accelerating%20the%20Supercycle%20in%20Commodities&body=https%3A%2F%2Fwww.goldmansachs.com%2Finsights%2Fseries%2Fbriefly%2F) Is Gaming the Pathway to the Metaverse? As the popularity — and profitability — of online gaming has surged, companies and investors are flocking to the sector. In the latest episode of Exchanges at Goldman Sachs, Jung Min, co-COO of Global Technology, Media and Telecom and co-head of TMT in Asia Ex-Japan for the Investment Banking Division, explains why gaming is becoming the next battleground for big tech. Games are more profitable today. Thanks to live operations and in-app purchases, games are providing a more predictable, recurring source of revenue as people play games for longer and spend more money in the games themselves, Min explains to host Allison Nathan, a senior strategist in Goldman Sachs Research. “Companies are basically able to predict how the game is going to perform in terms of revenue, and therefore, they can optimize their investment into the game and ultimately the profitability of the game,” Min says. M&A is on the rise. Consolidation is picking up as gaming companies merge to get larger while new entrants snap up gaming businesses to establish a presence in the sector. “A lot of M&A activity — which has introduced new companies into newer parts or areas of the overall games market — I think has actually created increasing competition amongst the different players.” Games are the pathway to the metaverse. “As big tech companies think about what is the next big thing that could really move the needle…games [are] the pathway into this ‘next internet.’ And so it's become very, very strategic for them,” Min says. With the transition to Web 3.0, new platforms, services and products are likely to be created, he adds. “If you look back at the past, every time we've had one of these transitions, it has meant that new platforms get created. So there are new companies that become important companies of that particular compute era or that era of the web at the time. New monetization models get created.” [Listen to podcast]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Is%20Gaming%20the%20Pathway%20to%20the%20Metaverse%3F&body=https%3A%2F%2Fwww.youtube.com%2Fwatch%3Fv%3D-4T40cEv9LM) BRIEFINGS Brainteaser: A Question as Easy as Pi? On Monday, the world marked Pi (π) Day. Yes, a whole day to celebrate the infinitely long number that begins with the digits 3.14 and has excited math enthusiasts for centuries. For this week’s BRIEFINGS brainteaser, can you tell us the formal definition of pi? A) The ratio of a circle’s diameter to its area B) The ratio of a circle’s circumference to its radius C) 3.141592654 D) The ratio of a circle’s circumference to its diameter To see if you are right, find the answer at the bottom of the newsletter below our Media Highlights. SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Briefings%20Brainteaser%3A%20How%20Well%20do%20You%20Know%20Pi%3F&body=) Goldman Sachs Media Highlights CNBC - March 15 [China Is Facing a ‘Perfect Storm,’ Says Goldman Sachs, Outlining 3 Major Risks]( (1:20) Bloomberg - March 14 [Goldman Sachs on Asia’s EV Outlook, Commodity Price Impact]( (5:16) CNBC - March 11 [There’s Been a Proliferation of ESG Rules in the Asia-Pacific, Says Goldman Sachs]( [Subscribe]( [Unsubscribe]( *The answer to our BRIEFINGS brainteaser is D: The ratio of a circle’s circumference to its diameter. Now, you shouldn't be caught off your toes on Pi Day ever again! The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. 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