Recession alarms are sounding, but (much) less loudly than before According to Reuters

(Reuters) – China’s economy quickly reopened, European gas prices plummeted and US inflation cooled, suggesting the global recession may not be as deep and lasting as feared. last week.

Yes, the warning signals are still flashing as inflation picked up and interest rates rose last year, but the strong recovery in world markets suggests optimism is returning.

The International Monetary Fund has raised its global growth outlook for 2023, and a severe eurozone recession was once considered certain to be less worrisome. Citi sees a 30% chance of a global recession this year, down from 50% in the second half of last year.

“Previous worries about a recession have receded and that is positive for risk assets,” said Richard McGuire, head of interest rate strategy at Rabobank.

Here’s what some closely watched market indexes say about recession risks.

1/ GOLDLOCK

The MSCI World Equity Index is up 8% year-to-date and the risk premium on junk bonds, or sub-investment-grade debt, is at its lowest since Q2 2022.

That is fueled by the so-called Goldilocks view that the global economy will cool just enough to quell inflation, but not so much that incomes will fall.

Corporate earnings are expected to improve from last year’s lows as inflation eases.

Excluding volatile energy companies, MSCI’s earnings per share growth for world-listed companies is expected to accelerate to 4.2 percent this year, from 1.0 percent. 8% expected for 2022, according to Barclays (LON:), then 9.3% in 2024.

But recovering stocks doesn’t mean the world will come out of recession, but that China’s reopening of its economy after COVID will limit the downturn. The MSCI index is still down 14% from its January 2022 peak.

Stocks move higher on ‘Goldilocks’ view https://www.reuters.com/graphics/GLOBAL-MARKETS/znvnbkqgkvl/chart.png

2/ PAUSE

Some of the biggest companies in the world include Meta, IBM (NYSE:) and Amazon (NASDAQ:) are cutting thousands of jobs.

But many of those fired were from tech companies that have been hiring aggressively during the pandemic, Goldman Sachs (NYSE:NYSE) economist Ronnie Walker noted.

“These characteristics suggest that companies conducting layoffs are not representative of the broader economy,” says Walker.

Indeed, US job growth accelerated in January while the unemployment rate hit its lowest level in more than 53 years. Job creation in 2022 was also much stronger than previously estimated, prompting Fed Chair Jerome Powell to make bellicose comments.

The tech sector leads the way in the number of employees laid off in January https://fingfx.thomsonreuters.com/gfx/mkt/zgvobkydjpd/MicrosoftTeams-image%20(6).png

3/ Dr. COPPER

Dubbed “Dr Copper” for its performance as a boom indicator, the metal has risen about 8% this year to around $9,005 a tonne as China’s economy reopens.

Copper also saw its price-to-gold ratio rise sharply from January’s three-month low. If investors buy and dump gold, they’re not too worried about the outlook.

But copper prices have fallen back recently, reflecting some caution as investors reassess expectations about the speed and scale of China’s recovery.

Dong https://fingfx.thomsonreuters.com/gfx/mkt/egvbyabggpq/copper.png

4/ HARD DATA, SOFT DATA

Euro zone business activity unexpectedly rebounded in January and China’s growth slowed less than expected.

Global data is delivering positive surprises at highest pace since May, Citi index shows

Most economists still expect a recession in the United States, but businesses and some banks have cut the probability.

Others noted that future growth indicators such as manufacturing activity, housing market data and consumer confidence remained dismal.

“A lot of the leading indices and surveys look pretty bad to face value, even though many of them are doing fine,” said Patrick Saner, head of macro strategy at Swiss Re (OTC:). fixed or even recovered”. “However, amid inflation, it is core services that matter and that is underpinned by a labor market that remains very strong and shows little sign of slowing down.”

Global business activity increases https://www.reuters.com/graphics/GLOBAL-ECONOMY/PMI/mopaklbolpa/chart.png

5/ EXCEPTIONS

Not everyone shares the optimistic view, with the bond market still bracing for a recession.

The yield curves for government bonds in the US, Germany and other countries are deeply inverted, meaning that short-term borrowing costs are much higher than long-term borrowing costs.

Historically, it’s been a reliable sign that a recession is coming. Both the 2-year/10-year and 3-month/10-year yield curves are the most inverted since the early 1980s.

Meanwhile, traders bet that the Fed will raise rates to 5%-5.25% then deliver at least one rate cut later this year.

And economists polled by Reuters expect global growth to hit just 2% this year, a level associated with historically severe recessions and warn of risks that this pace could be even slower.

Fed Alerts Fed Alerts https://www.reuters.com/graphics/GLOBAL-MARKETS/dwpkdejxqvm/chart.png