Source: Jin10 Data

The financial market shows that the possibility of an impending economic recession is increasing. Last week's market storm once sparked panic on Wall Street.

Although a recession still sounds distant, Goldman Sachs and JPMorgan's models show that the likelihood of an economic recession has increased significantly, as evidenced by signals from the US bond market and the performance of stocks that are extremely sensitive to business cycles.

Goldman Sachs' data shows that the US stock and bond markets currently believe that the probability of a US economic recession is 41%, higher than the 29% in April. This recent surge in probability is due to the market betting that the Fed will take more aggressive interest rate cuts and the stock market's lagging performance, which is extremely sensitive to business cycles. JPMorgan's similar model calculates that this probability has risen from 20% at the end of March to 31% due to the significant repricing of US Treasuries.

Nikolaos Panigirtzoglou, a strategist at JPMorgan, said the recession risk in the bank's model reflects the scale of rate cuts that have been priced since non-farm payroll data showed employment growth slowed last month. He said the stock market shows only a 20% chance of an economic recession, although the market implied zero probability earlier this year when the stock market rebounded to a new high.

"US credit and stock markets seem somewhat out of sync with the US interest rate market," he said. "If the August US household survey is as weak as July's, it could further strengthen the argument for a recession, and stock and credit markets need to weaken significantly to catch up with the rate market."

The job growth data announced on August 2 was lower than expected, which raised concerns about an economic slowdown because of fears that the Fed has been waiting too long to open up easing measures. However, although the data showed weak job growth, the monthly addition of new jobs remained above 0.1 million, and various indicators of economic health did not warn of an imminent recession. For example, the optimism of small businesses in the United States reached its highest level in more than two years in July.

In addition, economists' predictions of a recession probability have not increased significantly. Since approaching 70% in 2023, the consensus since April this year has remained at 30%.

The S&P 500 index has fallen more than 4% since its mid-July historic high, while the Nasdaq 100 index, which is dominated by technology stocks, has fallen more than 8% since its peak. The probability of a recession being priced in the interest rate market is higher than the likelihood in Goldman Sachs and JPMorgan's models. Goldman Sachs' model shows that the expected changes in the Federal Reserve's benchmark interest rate in the next 12 months suggest a 92% chance of an economic recession in the next year, while data from JPMorgan shows that the change in the five-year US Treasury yield indicates a 58% likelihood of an economic slowdown.

However, there are still many reassuring signals in the credit and mortgage markets, and risk levels have not raised too many concerns. Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, said that although the company's market model has increased the probability of a recession, the company's economists believe that the likelihood of an economic recession is only 25%, "which is still relatively low."

Editor / jayden