The International Monetary Fund and World Bank fanned growth fears further last week when they cut 2022 global forecasts by nearly a full percentage point.
After months focusing on central banks’ response to raging inflation, financial markets are being jolted into the realisation that a global economic downturn may now loom.
Sentiment dampeners include the Ukraine war, huge rises in energy and metals prices, aggressive central bank policy tightening led by the U.S. Federal Reserve, and China’s policy of locking down cities to ward off COVID.
On the data front, U.S. new home sales hitting two-year lows, weakening British and German consumer sentiment and new factory orders all point to slowing growth momentum.
Investors have reacted by pushing bond yields off recent multi-year highs, driving down oil prices from 14-year peaks and dumping currencies such as the Australian dollar and Brazilian real that had, until recently, surfed the commodity boom.
“The market likes to try and look to the next big thing,” said Craig Inches, head of rates at Royal London Asset Management. “For the last few months, it has been focused purely on inflation but now it’s starting to focus on recession.”
with global inflation at multi-decade highs, the tensions with growth may play out over months, forcing investors and policymakers alike to walk the thin line between the two.
Morgan Stanley strategist Mike Wilson outlines a ‘fire and ice’ scenario, where the Federal Reserve tightens policy into an economic slowdown.
Last week’s stock market selloff, especially weakness in materials and energy, were signs “of the market’s realization that we are now entering the ‘ice phase’ where growth becomes the primary concern for stocks, rather than inflation, the Fed, and interest rates,” Wilson said in a podcast.
World stocks have fallen 8% this month, but cyclical shares, closely correlated with economic growth, have lost 10%.
few expect a U.S. recession next year. Goldman Sachs for instance sees a 15% probability over the next year, rising to 35% over two years.
Valentijn van Nieuwenhuijzen, chief investment officer at NN Investment Partners, pointed to the resilience of Purchasing Managers’ Indexes (PMIs), forward-looking activity indicators, and pent-up demand for goods and services.
“We have been positively surprised how well corporates were able to protect their margins and profitability…so our base case remains a soft landing,” he said.
Still, the uncertainty is bringing some money back to government debt; BofA for instance recommends a ‘long’ Treasuries position, essentially a bet bond prices will rise.
U.S. inflation peaked last month and real GDP growth is set to peak this quarter, the bank reckons.