The markets appear to have put the heated debate over what is the correct definition of a recession. And an economic recession in the United States seems less and less likely in the eyes of the Stock market, according to a measure of recession odds created by strategists at JP Morgan Chase & Co.
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In fact, with the exception of base metals, prices in the major markets suggest equal or lesser odds of occurring after the US economy contracted for the second consecutive quarter.
Together, the equity, credit and rate markets have assigned a 40% chance to a US recession, up from 50% in June.
The apparent calm, especially in Actions, contrasts with warnings from economists and an inverted US yield curve, often seen as a sign of an approaching recession.
Projections among economists over the same period have risen to a 40% consensus versus 30%.
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To the extent that S&P 500 moves away from June lows and rises to the highest level in two months, the change in sentiment among equity investors could be a question of “sell the rumour, buy the fact“.
“The equity market was well ahead of the curve in terms of discounting recession risk in June and has now converged with other markets such as credit and rate markets.JP Morgan strategist Nikolaos Panigirtzoglou said.
The S&P 500 implies a 51% recession probability, down from 91% two months ago.
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Similarly, the price of junk bonds The US now carries a 24% chance of recession, up from 33% in June.
Only the Treasury and commodity markets appear to have a higher chance of a recession.
For the Treasury bond at five years, the probability has risen from 15% to 38%.
And the prices of raw materials They discount an 84% probability of recession, compared to 65% in June.
The renewed optimism of the markets contrasts with consecutive quarterly slowdowns in US economic activity this year.
Other key economic measures, including consumer spending and residential investment, have also recently shown signs of chill.
Junk bond markets are also showing signs of easing from the recession with their risk premiums reaching levels more typical for non-recessionary periods.
With Fed officials determined to crack down on the highest inflation in decades, even if it means derailing growth, strategists warn markets are bracing for a big disappointment.
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“I find it hard to agree with a lower recession probability, but event risk around this time is low and carry is a desirable attributesaid Peter Chatwell, head of global macro strategies trading at Mizuho International Plc.
“I expect a different market psyche to materialize in September“, hill.
BLOOMBERG
