A strong surge in stocks and bonds, indicates optimism for a smooth economic slowdown following a series of interest rate increases.
On the other hand, job markets show signs of weakening. The euro zone grapples with recession fears, and China’s property sector experiences a crisis. Despite the optimistic market trend, these challenges raise questions about the stability of the global economy.
Following are market indicators need to be closely monitored to know about global recession risks.
Growth in the US economy amid rise in Unemployment and Global disparities
Despite ominous recession warnings, the US economy defied expectations, achieving a robust 5.2% growth in the third quarter.
However, a concerning development emerges as unemployment climbs, approaching a critical ‘Sahm rule’ threshold.
Historically, a recession is indicated when the three-month rolling average unemployment rate increases by half a point above the lowest point of the preceding 12 months.
While China surpassed growth expectations in the third quarter, there’s a contrasting gloom in other regions.
Despite avoiding a recession in Q3, Britain’s economy struggled to show growth. In the Eurozone, a 0.1% contraction in Q3 and a widespread business activity downturn in November signal the potential onset of a year-end recession.
In general, economists anticipate a global economic slowdown next year, with the expectation of steering clear of a recession.
Everything is rally: Market optimism amid lingering risks
Faster-than-anticipated slowing of inflation has increased expectations for central bank rate cuts in the coming year. This has further fueled a widespread market rally, centered around the belief in a ‘soft landing’ scenario.
In November, a worldwide index of government and corporate investment-grade bonds achieved its highest monthly return ever.
During November, US 10-year Treasury yields experienced a significant decline of over 50 basis points, marking the most substantial monthly drop in more than a decade.
Global stocks surged approximately 9% in their most robust monthly performance since November 2020.
Back then, markets celebrated COVID-19 vaccines, anticipating the reopening of economies.
As we approach January, the prevailing perspective suggests that risks lean towards the downside.
There’s suspicion that investors may be undervaluing lingering global recession risks and the potential impact of decelerating economic growth.
Market anticipations doubling down
Traders are intensifying their predictions for rate cuts in 2024. Expectations are now pricing in a minimum of four 25 basis-point cuts from the US Federal Reserve. This level of anticipation hasn’t been seen since August.
Similar sentiments surround expectations for the European Central Bank (ECB), anticipated to take the lead among peers in making moves by April.
The projections for the first cut have swiftly shifted, moving from being priced for July in late October. It underscores the increasingly pessimistic outlook for the eurozone.
These shifts in expectations might also indicate anticipations of rate cuts aimed at preventing excessive tightening of lending conditions amid falling inflation.
It’s not solely driven by fears of a recession but also by market indications that interest rates will likely stay elevated for an extended period.
Expressing a positive sentiment, Apollo Global Management’s chief economist, Torsten Slok, remarked, “The market is extremely bullish on the economic outlook over the next five years.”
Global Recession Risks
By September, global corporate defaults for the year reached 118, nearly doubling the total for 2022, as reported by S&P Global.
This trend is causing concern for policymakers, who are closely monitoring the repercussions of rate hikes, knowing that their impact operates with a time lag.
Property companies are facing significant challenges, with notable impacts on entities like Sweden’s SBB (SBBb.ST), Austria’s Signa, and China’s Country Garden (2007.HK).
The Bank of England is cautioning lenders not to underestimate the risk of loan defaults. Particularly as higher inflation and rates impact vulnerable borrowers.
In October, business insolvencies in England and Wales recorded an 18% annual increase.
For the first time since 2015, lending to businesses in the euro zone has experienced a decline.
Despite the drop in euro zone business lending, corporate debt markets appear unperturbed.
The cost of insuring exposure to high-yield bonds in Europe, measured through credit default swaps, reached its lowest point this week since April 2022.
Oil decline amid Hamas-Esrael war concerns
Oil, often indicative of global growth expectations, has seen a decrease of around 14% in the last two months.
This period coincided with concerns about a potential Israel-Hamas conflict disrupting supplies and leading to price increases.
Brent crude has fallen to $84, down from nearly $97 in late September.
This decline is partly attributed to the further weakening of the Chinese and European economies.
If the Israel-Hamas war leads to severe supply shocks and pushes Brent crude to $150, a level it has never reached, indicating mild global recession risk.