New York: In a week marked by fresh recession angst from Wall Street to Davos, JPMorgan Chase & Co. finds the odds of an economic downturn priced into financial markets have actually fallen sharply from their 2022 highs.
According to the firm’s trading model, seven of nine asset classes from high-grade bonds to European stocks now show less than a 50 per cent chance of a recession. That’s a big reversal from October when a contraction was effectively seen as a done deal across markets.
Global money managers are far from bullish on the economic trajectory with the S&P 500 still assigning a 73 per cent probability that a recession will ensue. But that’s down from as high as 98 per cent last year and it’s consistent with an uptick in wagers on a soft landing that sparked an earlier new year rally.
And after Wall Street’s worst year since the financial crisis, bank executives at the World Economic Forum’s annual gathering found reasons to be hopeful in cooling inflation and the reopening of China.
“Most asset classes have been steadily pricing out recession risks helped by China reopening, the collapse in gas prices in Europe and larger than expected inflation downshifting in the US,” said JPMorgan strategist Nikolaos Panigirtzoglou. “The market expects a much lower chance of recession than it did back in October.”
Panigirtzoglou’s own colleague, Marko Kolanovic, warns investors may be underpricing the potential pressure on stocks from a growth slowdown in the months ahead. At the same time bears can find fresh ammo in weaker factory output and retail sales as well as a bond rally, while Federal Reserve officials warned rates would remain in restrictive territory.
Not so upbeat
But thanks to a slow-burn rally of late, US high-yield credit has seen some of the sharpest repricing, with recession odds dropping to 18 per cent from 33 per cent. European markets have also suddenly danced to a bullish beat. The EuroStoxx index reflects just a 26 per cent probability “- down from 93 per cent. JPMorgan calculates the metrics by comparing the pre-recession peaks of various classes and their troughs during the economic contraction.
Economists are not so upbeat. Their consensus forecast has jumped to 65 per cent from 50 per cent in October.
Meanwhile the bond market’s favorite recession signal, the Treasury yield curve, continues to flash a warning. For example, three-month bills yield more than their 10-year equivalents, suggesting investors are betting on a slowing growth trajectory.
Even so, some investors are betting that central bankers will be able to engineer a soft landing after all, driving a bounce in recent weeks across riskier assets from emerging markets and junk bonds to meme stocks.
“It’s not that I’m saying growth is going to go through the roof, the only thing I’m going to say is that it’s not going be a Rocky Horror Show,” HSBC Bank Plc strategist Max Kettner said in an interview with Bloomberg TV. “There’s simply a lack of downside catalysts, a lack of downside surprises, and therefore, the only way is up.”