

Market Analysis
Recent disappointing U.S. jobs data has cast doubt on the likelihood of a soft landing for the world's largest economy, causing global equity markets to plummet and leading to increased expectations for interest rate cuts.
Additionally, a significant pullback from the popular yen carry trade has contributed to the market selloff, complicating the economic outlook conveyed by asset prices.
Predicting the chance of a recession is challenging. Goldman Sachs has raised its recession probability for the U.S. to 25%, while JPMorgan estimates a 35% chance of a recession beginning before the end of the year.
Here's what five key market indicators reveal about global recession risks:
Data Discrepancies
The U.S. unemployment rate surged to 4.3% in July, approaching a three-year high, amid a sharp decline in hiring. This increase triggered concerns, as it met a key threshold of the "Sahm rule," which historically signals a recession when the three-month rolling average of the unemployment rate rises by half a percentage point above the lowest level of the previous year.
However, many economists believe the market's reaction to this data might be overstated, possibly influenced by immigration factors and Hurricane Beryl. Positive jobless claims data released on Thursday also provided some reassurance, leading to a stock market rebound.
“Payrolls are still growing. If we started to see payrolls decrease, that would be a stronger signal of a potential recession,” noted Dario Perkins, managing director of global macro at TS Lombard.
The U.S. economy grew by 2.8% on an annualized basis in the second quarter, double the growth rate of the first quarter and in line with pre-pandemic averages. Services sector activity also suggests ongoing growth. Outside the U.S., business activity indicators point to weakening growth in the euro zone, while China's recovery remains uncertain.
Global economic data surprises are at their highest rate since mid-2022, according to Citi's surprise index.
Corporate Market Trends
The MSCI global stocks index has fallen more than 6% from its record highs in July, and the S&P 500 has dropped over 4% so far in August. Despite these declines, analysts believe that global stocks, which are still up approximately 7% for the year, do not necessarily signal an impending recession.
Goldman Sachs estimates that a further 10% decline in U.S. equities would only reduce growth by just under half a percentage point over the next year.
Credit conditions may be more telling, with analysts noting that while the risk premium on corporate bonds has widened in Europe and the U.S., it is merely correcting from historically tight levels. The changes have not yet reached levels that would suggest high recession risks.
The gap between U.S. investment-grade bonds and Treasury yields, a measure of recession expectations, is currently about half the level observed in 2022-2023, according to Bank of America.
Interest Rate Cuts
Following the U.S. jobs data and a dovish stance from the Federal Reserve, traders now anticipate around 100 basis points of rate cuts by year-end. This is a decrease from over 130 basis points earlier in the week but still double the roughly 50 basis points expected on July 29. Markets also foresee a better-than-50% chance of a significant 50 basis point rate cut in September.
Major banks have adjusted their expectations, with Steve Ryder of Aviva Investors forecasting three rate cuts this year. Given the ongoing uncertainty, the market's expectation for additional cuts is understandable.
In Europe, traders also predict a high likelihood of three more rate cuts by the European Central Bank this year, up from less than a full chance of a second cut in mid-July.
Yield Curve Movements
The anticipation of rate cuts has caused shorter-dated U.S. Treasury yields to drop, and the yield curve between 10-year and 2-year Treasuries turned positive for the first time since July 2022.
While an inverted yield curve has historically been a reliable recession predictor, it often returns to normal as a recession approaches. Given its prolonged inversion without a recession, many strategists now view it as a less reliable indicator.
As of Thursday, the curve had inverted again, standing at minus 5 basis points.
Copper’s Signal
Known as "Dr. Copper" for its historical role as a recession indicator, copper prices have fallen to four-and-a-half-month lows this week, signaling recession concerns. Trading at approximately $8,750 per metric ton, three-month copper prices on the London Metal Exchange have declined roughly 20% from their peak in May, reflecting a pessimistic outlook on global economic health.
Oil prices, another indicator of global demand, are near multi-month lows. However, concerns about Middle East tensions and potential supply disruptions have limited further declines.
Paraphrasing text from "Reuters" all rights reserved by the original author.