Although the signals from the stock market indicate that there is only a 20% possibility of an economic recession, if the next economic data continues to be weak, the stock and credit markets may experience a significant decline, in sync with the bond market.
According to the models of Goldman Sachs and JPMorgan, the possibility of an economic recession in the United States has significantly increased.
Goldman Sachs stated that the stock and bond markets are expected to have a 41% chance of a recession in the United States, up from 29% in April.
JPMorgan's models also show that the possibility of an economic recession in the United States has risen from 20% at the end of March to 31% due to the repricing of US Treasury bonds.
These conclusions are derived from signals from the US bond market and sensitive stock performance to the business cycle. Analysis indicates that the recent rise in the stock market is due to market speculation that the Federal Reserve will cut interest rates more aggressively. However, if the next economic data continue to be weak, the stock and credit markets may experience a significant decline in sync with the bond market. The market is closely watching tonight's release of US July CPI data.
Last night, the US released PPI inflation data, which slowed down significantly, rising 2.2% YoY, below the expected 2.3% and the previous value of 2.6%. The market is now more bullish about the possibility of the Federal Reserve cutting interest rates by 50 basis points in September. US stocks closed at a daily high.
JPMorgan strategist Nikolaos Panigirtzoglou said that although signals from the stock market indicate that the probability of an economic recession is only 20%, this probability is still higher than the 'zero probability' when the stock market reached new highs earlier this year. This means that although the stock market does not yet consider the risk of an economic recession to be high, this risk is increasing.
"The US credit and equity markets look detached from the US bond market," he said. "If next month's US economic data is as weak as the July survey results, the argument for a recession will be even stronger, and the stock and credit markets may experience a significant decline to catch up with the pessimistic expectations reflected in the bond market."
According to Goldman Sachs' and JPMorgan's models, the bond market has higher expectations for an economic recession than the stock market. Goldman Sachs' model shows that the implied change in the benchmark interest rate after 12 months indicates a 92% probability of a recession next year, while JPMorgan's data indicates a 58% chance of an economic slowdown based on changes in the five-year US Treasury yield.
The released job growth data on August 2nd was lower than expected, causing concerns in the market that the Federal Reserve may wait too long to start loosening monetary policy. Although employment data has fluctuated, economists' recession forecasts have not significantly increased. Since April, market consensus forecasts have remained at 30%, and in early 2023, the predicted recession probability had reached nearly 70%. Data released by NFIB last night also showed that small business optimism in the United States in July rose to a more than two-year high, becoming more optimistic about economic and sales prospects.
Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, said that although Goldman Sachs' market model shows that the possibility of an economic downturn is increasing, the bank's economists believe that the probability of an economic downturn is only 25%, which is still relatively low.
Editor/Somer