Markets signal US more likely hurtling towards recession

Bloomberg

Many financial markets are already signalling that the US is more likely than not hurtling towards recession.
But will they prove prescient or overly fretful?
The prospect of a widespread yield inversion in the Treasury market, which has preceded US downturns for more than half a century, has generated the most alarm and is edging even closer to fruition. When falling yields are combined with the declines since the third quarter in stocks and commodities, as well as investment-grade and junk-rated corporate debt, it suggests about a 50 percent probability of an economic contraction within a year, according to JPMorgan Chase & Co.
“The markets have already priced in a lot of downside risk,” said Nikolaos Panigirtzoglou, a JPMorgan global markets strategist in London.
Riskier assets from stocks to credit took a hit late in 2018, while Treasury yields rose as the Federal Reserve looked intent on plowing ahead with its hiking cycle and tightening liquidity even amid signs of ebbing output. While a blockbuster jobs report for December and the Fed signalling a pause in tightening has helped to reverse some of those moves, the threat of trouble still looms.
“Liquidity from central banks has tightened significantly, China is more on the slowdown side of things, and the Trump administration won’t be as aggressive on fiscal stimulus as before,” said Kokou Agbo-Bloua, global head of flow strategy and solutions at Societe Generale SA, which predicts a 2020 downturn. “All the drivers for the bull run we’ve had in risky asset over the past five years are pretty much gone.”
Bank of America’s recession indicators have also jumped noticeably in recent weeks, even as their analysts say the economic data doesn’t show that. One gauge in particular that takes into account movements in the S&P 500 Index and the spread between 3-month and 10-year Treasury yields points to a 64 percent chance of recession over the next year. Goldman Sachs Group Inc’s market-based model puts recession odds at 50 percent, which is well above the 15 percent probability their economists see for a contraction over the next year.
By some measures, the stock market was the most divorced from the economy in 30 years during the December rout. But since the Christmas Eve meltdown, equities have staged a 10 percent rebound, making some investors wondering a bottom has been found. JPMorgan’s Panigirtzoglou, who says it is most likely that only a mild recession eventually takes place, sees the degree risk-assets have already priced in a contraction as “a bullish message” for equities, high-grade credit and commodities.
“The fundamentals are changing, but not as bad as what the market seems to be pricing in,” said Aaron Clark, a portfolio manager at Boston-based GW&K Investment Management managing $36 billion.
To Rich Guerrini, chief executive officer of PNC Investments, it’s too early for recession talk and he says there’s a “strong case for equities.”
Earnings should grow by about 7 percent this year, even as companies lower guidance and US economic output is set to
increase 2.5 percent. Investment-grade credit spreads over government debt yields widened nearly 50 basis points in the final three months of 2018 as trade tensions added to other concerns, making the securities one of the worst-performing US asset classes last year.