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It's a risk U.S. Treasury Secretary Janet Yellen and European
Central Bank chief Christine Lagarde have acknowledged even if
neither considers it a baseline scenario. Federal Reserve chief
Jerome Powell rejects the notion..
Paul O'Connor, head of the multi-asset team at Janus Henderson,
notes that since 1955 "the U.S. economy has always experienced a
recession within two years from every quarter in which inflation
was above 4% and unemployment was below 5%, as they are today."
The International Monetary Fund this week warned inflation and
war may push the world economy to the brink of recession.
Here's what some key recession risk indicators say:
1/ OLD FAVOURITE
The U.S. Treasury yield curve has a track record of predicting
recessions, especially when two-year yields rise above 10-year
maturities. The 2/10s yield curve has inverted before every one
of the last 10 U.S. recessions.
The yield gap between the two maturities is around -20 bps, and
was recently its most inverted since 2000.
Central banks are jacking up interest rates. The Fed just
delivered a second 75 basis-point increase on Wednesday to tame
9.1% inflation.
(Graphics:
https://graphics.reuters.com/GLOBAL-MARKETS/RECESSIONRISK/
byvrjwwmnve/chart.png)
2/ GAS-FLATION
Some investors tie global recession risks to gas supplies from
Russia.
The IMF says a complete supply cut to Europe by year-end and
another 30% drop in Russian oil exports would see European and
U.S. growth at virtually zero.
Global growth could slow to 2% in 2023, it warns, a level
effectively amounting to recession given population growth and
poor countries' need for faster expansion.
European gas prices have soared 180% already this year.
An "inflationary recession" in Europe this year will ripple
outward, asset manager PIMCO said, noting the United States
sends a third of its exports to Europe and relies on European
Union producers for 25% of its imports.
(Graphics:
https://graphics.reuters.com/GLOBAL-MARKETS/RECESSIONRISK/
xmpjoddjgvr/chart.png)
3/ PMI SHOCK
Purchasing Managers Indexes are reliable predictors of
manufacturing, services, inventories, orders, and therefore
future growth. So, the unexpected contraction in U.S. and euro
zone July PMIs sparked an investor dash for the safety of bonds.
For Citi analysts, the July PMIs confirm that Germany is in
recession, with the euro area not far behind.
Within global PMIs, higher inventories typically signal slower
growth, especially if accompanied by a slide in new orders.
Goldman Sachs noted this ratio hit its lowest level since May
2020 this month.
(Graphics:
https://graphics.reuters.com/GLOBAL-MARKETS/RECESSIONRISK/
zdpxobbanvx/chart.png)
4/ COUNTING COMMODITIES
Copper, a growth bellwether, is down 22% this year.
Dubbed "Dr Copper" because of its record as a boom-bust
indicator, the metal has also seen its price ratio to safe-haven
gold hit an 18-month low.
Standard Chartered said recessionary fears had caused a fall in
base metal prices and it had revised down its forecasts.
Brent crude prices have also slid for two straight months.
(Graphics:
https://graphics.reuters.com/GLOBAL-MARKETS/RECESSIONRISK
/klvykyymwvg/chart.png)
5/ WATCH JUNK
Corporate sector stress, especially at the lower end of the
credit spectrum, is another warning signal.
Financing costs for sub-investment grade, or "junk" U.S.
companies stand just below 8%, having almost doubled this year,
while in euro markets, yields have soared to 6.4% from 2.8% in
early-2022.
(Graphics:
https://graphics.reuters.com/GLOBAL-MARKETS/RECESSIONRISK/
dwvkrbblxpm/chart.png)
6/ NO CONFIDENCE
Citi's Economic Surprise Index, measuring the degree to which
data beats or misses forecasts, is down sharply for Europe and
the United States.
Consumer confidence moves are especially noteworthy; the U.S.
Conference Board's consumer confidence index fell to a nearly
1-1/2 year low in July while German sentiment will hit another
record low in August, a survey forecast.
"The No. 1 point is consumer confidence, reflecting worsening
purchasing power," Indosuez Wealth Management CIO Vincent
Manuel, said.
The University of Michigan consumer sentiment index, currently
around 50, is approaching "recession levels," he added.
(Graphics:
https://graphics.reuters.com/GLOBAL-MARKETS/RECESSIONRISK/
akpezwwjnvr/chart.png)
(Reporting by Dhara Ranasinghe and Sujata Rao, additional
reporting by Yoruk Bahceli in Amsterdam, graphics by Vincent
Flasseur, Editing by Tommy Reggiori Wilkes and Toby Chopra)
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