By Yoruk Bahceli and Dhara Ranasinghe
(Reuters) – Disappointing U.S. jobs data has shaken confidence in a soft landing for the world’s largest economy, sending global equity markets tumbling and bets on rate of interest cuts surging.
But investors abandoning a preferred yen carry trade has played an infinite role inside the selloff, complicating the message from asset prices on the economic outlook.
The likelihood of a recession is anyone’s guess. Goldman Sachs has raised its odds of a U.S. recession to 25%. JPMorgan sees a 35% probability of 1 starting before year-end.
Here’s what five closely-watched market indicators say about global recession risks:
1/ DATA PUZZLE
The U.S. unemployment rate jumped near a three-year high of 4.3% in July amid a giant slowdown in hiring.
It fanned recession fears by reaching a trigger point of the “Sahm rule”, which has shown historically a recession is underway when the three-month rolling average unemployment rate rises half a percentage point above the low of the prior 12 months.
Still, many economists reckon the response to the knowledge was overblown given the numbers may be skewed by immigration and Hurricane Beryl. Higher-than-expected jobless claims data on Thursday also supported that view, sending stocks rallying.
“Payrolls are still growing. While you began to see payrolls turn negative, which may make me far more concerned that an actual recession is starting,” said Dario Perkins, managing director, global macro at consultancy TS Lombard.
The U.S. economy grew 2.8% inside the second quarter on an annualised basis, double the first quarter rate and on par with the pre-pandemic average. Services activity also points to growth continuing.
Beyond america, nonetheless, business activity indicators point to faltering euro zone growth, while China’s recovery stays fragile.
Global economic data is delivering negative surprises near the perfect rate since mid-2022, Citi’s surprise index shows.
2/ CORPORATE ROUT
MSCI’s global stocks index is down greater than 6% from July’s record highs, while the U.S. S&P 500 has lost over 4% so far in August.
Yet analysts reckon stocks, which might be still up around 7% globally this 12 months, are faraway from signalling a recession.
Goldman Sachs estimates that every further 10% selloff in U.S. equities would in the reduction of growth over the next 12 months by slightly below half a percentage point.
Credit conditions could prove more obligatory, analysts say.
They note that although the danger premium corporate bonds pay over government bonds has widened in Europe and america, it was correcting from historically tight levels and moves weren’t yet pronounced enough to suggested recession risks were high.
Recession expectations implied by the gap between U.S. investment grade bond and Treasury yields are about half as high as they were in 2022-2023, consistent with BofA.
3/ CUT AWAY
Spurred on by the U.S. jobs data and a dovish-sounding Federal Reserve, traders now price in around 100 basis points of cuts in U.S. rates by year-end.
That’s down from over 130 bps earlier this week, but double the roughly 50 bps anticipated on July 29. Markets also price in greater than a 50% probability of a hefty 50 bps September cut.
Major banks have also added to the Fed cuts they expect this 12 months.
Steve Ryder, portfolio manager at Aviva Investors, said the Fed was liable to cut rates 3 times this 12 months, but given uncertainty around how economic data evolves, it was comprehensible that markets were pricing the probability that it’d should cut more.
Elsewhere, traders see a high probability of three more European Central Bank rate cuts this 12 months, having seen lower than a full probability of a second cut in mid-July.
4/ YIELD CURVE
Rate cut bets have sent shorter-dated U.S. Treasury yields tumbling and the closely-watched an element of the yield curve that tracks the gap between 10-year and 2-year Treasury yields turned positive for the first time since July 2022 on Monday.
While a yield curve inversion has historically been seen as a wonderful predictor of a recession on the horizon, the curve tends to revert back to normal since the recession nears.
Nevertheless, with the curve inverted for a record time this cycle with no recession materialising, a majority of strategists Reuters polled earlier this 12 months not see it as a reliable recession indicator.
The curve has inverted back since, standing at minus 5 basis points on Thursday.
5/ DR COPPER
Known as “Dr Copper” for its track record as a boom-bust indicator, the metal’s fall to 4-1/2 month lows this week puts it firmly on the recession watch list.
Trading at around $8,750 a metric ton, three-month London Metal Exchange copper prices have slumped roughly 20% from a record high scaled in May, reflecting pessimism in regards to the global economic outlook.
Oil prices, one other barometer of the health of worldwide demand, are near multi-month lows. But their fall has been limited by worries that Middle East tensions could squeeze supplies from the most important oil producing region.
(Reporting by Yoruk Bahceli and Dhara Ranasinghe; editing by Tomasz Janowski)