For now, the market appears to have emerged from a heated debate over what is the correct definition of a U.S. recession. And according to the recession probability measure developed by JPMorgan Chase strategists, from the stock market, the possibility of a recession in the United States is becoming less and less likely.
In fact, pricing in major markets other than base metals suggests a 50% chance of a recession or less after two consecutive quarters of negative U.S. GDP. Equity, credit and interest rate markets see a 40% chance of a U.S. recession from 50% in June.
This apparent calm, especially in the stock market, contradicts warnings from economists and the inversion of the key U.S. Treasury yield curve, often seen as a signal that a recession is imminent. Over the same period, economists’ recession expectations jumped from 30% to 40%.
As the S&P 500 recovers from a June low to its highest level in two months, a shift in sentiment among equity investors could be “sell the rumor, buy the fact . “
JPMorgan strategist Nikolaos Panigirtzoglou said:
“Equity priced recession risk well ahead of the curve in June and has now converged with other markets such as credit and interest rate markets.”
The S&P 500 pointed to a 51% chance of a U.S. recession, down from 91% two months ago. Likewise, U.S. high-yield bonds, or junk bonds, are now priced in a recession of 24%, down from 33% in June.
Only U.S. Treasuries and commodity markets (base metals) are pricing in a recession higher. Recession pricing for the five-year Treasury note climbed from 15% to 38%. Commodity markets are pricing in a U.S. recession at 84%, compared to 65% in June.
While other key economic indicators, including consumer spending and residential investment, have recently shown signs of cooling, the fact that U.S. economic activity has slowed for several quarters this year has been overshadowed by renewed optimism.
Even the junk bond market is signaling that recession expectations have eased, with risk premia at levels more common in non-recessionary U.S. economies.
But with Fed officials determined to take aggressive action to contain the highest inflation in 40 years, even if it means stifling economic growth, strategists have warned that today’s optimistic and calm markets could be disappointed in the future.