- Last week’s stock market selloff, especially weakness in materials and energy.
- The latest lockdowns will likely pressure the index further.
- Valentijn van Nieuwenhuijzen, chief investment officer at NN Investment Partners, pointed to the resilience of Purchasing Managers’ Indexes (PMIs).
After months of focusing on central banks’ responses to soaring inflation, financial markets are being shaken awake to the possibility of a worldwide economic slowdown as reported by Reuters.
Aggressive policy
Sentiment dampeners include the Ukraine war, huge rises in energy and metals prices, aggressive central bank policy tightening led by the U.S. Federal Reserve, and China’s policy of locking down cities to ward off COVID.
Financial analysts too are increasingly pessimistic, with Deutsche Bank seeing an “outright” U.S. recession by end-2023.
They include warnings this week from shipping groups Maersk.
Maersk and Kuehne & Nagel (KNIN.S) about falling container volumes, and parcel service UPS predicting e-commerce growth to cool.
Deutsche Bank, reporting earnings on Wednesday, flagged credit losses could rise “significantly”.
Slowing growth momentum
On the data front, U.S. new home sales hitting two-year lows, weakening British and German consumer sentiment and new factory orders all point to slowing growth momentum.
Investors have reacted by pushing bond yields off recent multi-year highs, driving down oil prices from 14-year peaks and dumping currencies such as the Australian dollar and Brazilian real that had, until recently, surfed the commodity boom.
“For the last few months, it has been focused purely on inflation but now it’s starting to focus on recession.”
Does that mean we are moving towards a harder landing?”
Last week’s stock market selloff, especially weakness in materials and energy, signed “of the market’s realization that we are now entering the ‘ice phase’ where growth becomes the primary concern for stocks, rather than inflation, the Fed, and interest rates,” Wilson said in a podcast.
Market expectations
Reading the recession tea leaves is not easy, and economists use a raft of indicators, including signals from equity and bond markets, to interpret the outlook.
An inversion in this curve — when shorter-dated yields rise above longer counterparts — usually means a recession within two years.
It is probably too early to say a rethink is underway on where U.S. interest rates might top out, but money market expectations for the so-called terminal rate have eased since Friday by around 30 bps.
Fathom Consulting’s China Momentum Index, unifying freight volumes, power consumption and bank loans may bear watching.
The gauge, reportedly favoured by Premier Li Keqiang, fell to 4.6% in January, from 24 last February.
The latest lockdowns will likely pressure the index further.
Complicated
Deutsche Bank aside, few expect a U.S. recession next year.
Goldman Sachs for instance sees a 15% probability over the next year, rising to 35% over two years.
Valentijn van Nieuwenhuijzen, chief investment officer at NN Investment Partners, pointed to the resilience of Purchasing Managers’ Indexes (PMIs), forward-looking activity indicators, and pent-up demand for goods and services.
“We have been positively surprised how well corporates were able to protect their margins and profitability…so our base case remains a soft landing,” he said.
U.S. inflation peaked last month and real GDP growth is set to peak this quarter, the bank reckons.
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Source: Reuters
