Together equity and bond markets are assigning a 41% probability to a US recession, up from 29% in April, according to Goldman. — Bloomberg
NEW YORK: Financial markets are flashing a higher probability of an oncoming recession in the wake the market maelstrom that briefly sparked fear across Wall Street last week.
It still remains an outside chance. But models from Goldman Sachs Group Inc and JPMorgan Chase & Co showed that the market-implied odds of an economic downturn has risen materially, judging by signals in the US bond market and to a lesser extent the performance of stocks that are acutely sensitive to the ebbs and flows of the business cycle.
Together equity and bond markets are assigning a 41% probability to a US recession, up from 29% in April, according to Goldman, with the latest jump driven by the market wagering on a more aggressive pace of rate cuts from the Federal Reserve (Fed) and the lagging performance of stocks that are acutely sensitive to the ebbs and flows of the business cycle.
A similar model by JPMorgan calculates the odds to be 31%, jumping from 20% since the end of March, due to the sharp repricing in US Treasuries.
JPMorgan strategist Nikolaos Panigirtzoglou said the recession risk in the bank’s model reflects the scale of rate cuts that have been priced in since the employment report showed a slowdown in job growth last month.
He said the stock market signals just a one-in-five chance of a recession, albeit up from the zero that was priced in when equities were rallying to fresh records earlier this year.
“US credit and equity markets look disconnected from US rate markets,” he said.
“If the next US household survey for August is similarly weak as July, reinforcing the recession thesis, equity and credit markets would need to weaken significantly to catch up with rate markets.”The weaker-than-expected job-growth figures on Aug 2 raised concerns of a slowdown by fanning fears the Fed has waited too long to start easing monetary policy.
While the data showed weaker hiring, the monthly rate remained above 100,000 and various measures of the health of the economy aren’t warning of an imminent recession. US small-business optimism, for example, recently increased to a more than two-year high in July.
Moreover, the forecasts among economists haven’t materially increased, with the consensus staying at 30% since April after reaching nearly 70% in 2023.
The S&P 500 is still down over 4% since it’s record-high in mid-July while the tech-heavy Nasdaq 100 is down more than 8% from its peak. Rate markets are pricing in the higher odds of recession that equities in the Goldman and JPMorgan models.
The 12-month forward implied change in the Fed’s benchmark rate is implying a 92% odds of a recession in the next year, according to Goldman’s models, while the move in five-year Treasury yields shows a 58% chance of economic slowdown according to JPMorgan.
Still, there’s plenty of soothing signals in the credit and mortgage markets, where risk levels aren’t signalling much concern.
Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, said that despite the increased odds assigned by its market model, the firm’s economists only see a 25% chance of a downturn, “which is still relatively low.” — Bloomberg
