Financial markets now are signalling that the market is increasingly worried about the outlook for the economy. Market-implied recession odds had actually shot higher, JPMorgan Chase & Co. analysis found, instead of lower. This measure is derived from the firms constructing its market oriented measures, giving a glimpse of the future economic conditions price across the broad asset classes.
Assets Implicitly More Concerned About a Potential Assessment
Panic is currently being priced-in by the Russell 2000 index list of lower cap companies. That index now is putting the chance of a recession at 79% (JPMorgan data) The thesis of this high number is that investors in smaller businesses are particularly attuned to economic conditions and they do see coming headwinds to their growth outlook. The same goes for the S&P 500 index, which captures broader US stock market recession risk. The assessment shows that this the benchmark index suggesting a 62% chance of a recession. The numbers show a level of jitters among equity investors regarding a looming economic slowdown.
Other asset classes have also signalled caution
Caution on the economic outlook is showing elsewhere than in the equity market: other asset classes are also reflecting some cautiousness. But an apparent contradiction in terms is that base metals — which are conventional indicators of industrial activity and economic health — are pricing in a 68 percent probability of recession for the base-metal complex now. This suggests that expectations based within the industrial space for future demand may be cooling some. The five-year Treasury note market is also reflecting more uncertainty about the economy. The government bonds are actually pricing in a 54% chance of a recession. However, yields on such notes can also be influenced by expectations for the future path of interest rates and the overall economy, and current pricing implies a cautious view of medium-run economic prospects.
Yet the fundamentals could change as well: credit markets look rather stable
While this relatively positive perspective doesn’t appear to be priced into the investment-grade credit market (indeed it looks comparatively stable within the broader spectrum of signals from equity and other markets), And in this part, a JPMorgan analysis points to recession odds that are still pegged at 25%. While better than the zero it hit in November, that is still a long way from the recession chances currently priced into equities and base metals. This difference suggests that as of now, investors in high quality corporate debt are believing there is a lesser chance that a recession spills over to these firms and makes them default on their debts. It would be easier to dismiss given all the other factors if the report didn’t also show some capacity to generate funding pressure in the credit markets, relative stability is obviously relative stability but is perhaps also something that should be monitored.
Mixed Signals — Why It Now Leaves the Economy Hanging
The present state of play of financial markets is one that is characterised by an ever-widening chasm in terms of the signals being issued by different buckets of assets. Even as equity markets and more allowing one or two commodities hovers at wires urging a huge jump this day in recession fears, the investment-grade credit market has been a good bet, familiar hazards as firms. This multitude of signals demonstrates how challenging it is to always predict future economic performance. Changes in monetary policy, the fiscal implications and evolution of the global economy will define the real path of the economy. The market-based indicators explored in this analysis can tell us a little about current investor sentiment and expectations, but do not provide precise forecasts of future events. More observation and consideration of these and other economic metrics will be required in to have an idea of what the evolving economic landscape will look like.
