Is a global recession coming? Financial market movements suggest so

Global markets shake as central banks get more hawkish

Global stocks have gone through wild swings since Russia invaded Ukraine. On Friday, they closed with their biggest weekly decline since the March 2020 pandemic meltdown as investors worried that a tightening of anti-inflation central bank monetary policy could hurt economic growth.

After a week of hard-hitting moves across all asset classes, risk assets posted their worst performance in more than two years as major central banks doubled down on policy tightening to rein in runaway inflation, raising fears among investors a global economic slowdown.

These market movements highlight the risks of recession.

What has also gained ground in recent weeks are bets that the age-old engine of the recession, central banks, may once again be the cause.

India’s 30-stock S&P BSE Sensex and the broader NSE Nifty had their worst week since May 2020. Both hit more than a year lows in their sixth consecutive session of losses, with the blue chip indices recording losses of about 5.5% each. for the week.

The scale of the collapse is similar to the reaction of financial markets to fears of a global economic recession due to the pandemic in 2020, which was more or less accurate.

For the week, the S&P 500 fell 5.8%, its biggest drop since the third week of 2020.

“Inflation, war and lockdowns in China have derailed the global recovery,” Bank of America economists said in a note to clients, adding that they saw a 40% chance of a US recession. United next year as the Fed continues to hike rates. .

“We expect GDP growth to slow to almost zero, inflation to stabilize around 3% and the Fed to raise rates above 4%.”

Expectations about the extent of policy tightening by major central banks to combat runaway inflation have risen, shaking global markets and rattling investors.

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The dominant theme affecting equity markets globally is the synchronized global monetary tightening and related economic slowdown fears. Indeed, investors remained uncertain about future economic growth should global borrowing rates rise.

The biggest US rate hike since 1994, the first such Swiss move in 15 years, the fifth UK rate hike since December and a decision by the European Central Bank to support the indebted south ahead of future hikes followed one another on choppy markets.

Investors are bracing for bolder and, in some cases, unprecedented tightening measures.

“If a central bank doesn’t act aggressively, yields and the price of risk will translate more into rate hikes,” said NatWest Markets strategist John Briggs.

“Markets may simply permanently adjust to a prospect of higher global policy rates…because the policy momentum of global central banks is one-sided.”

On Friday, federal funds futures priced a 44.6% chance of U.S. rates hitting 3.5% by the end of the year, from the current level of 1.58%, according to FedWatch of the CME. This probability was less than 1% a week ago.

Growing aggressiveness has fueled wild moves in global markets as central banks rush to undo monetary support measures that have helped propel asset prices higher for years.

Fears that the Fed’s aggressive rate hike path could push the economy into recession have grown recently, slamming stocks – which entered bearish territory earlier this week when the S&P 500 extended a decline of its record at more than 20%. The index’s 6% drop in its worst weekly drop since March 2020.

Changing rate expectations also triggered sharp swings in bond and money markets.

Reuters reported that the ICE BofAML MOVE Index, which tracks Treasury volatility, is at its highest level since March 2020, while Deutsche Bank’s Currency Volatility Index measures expectations for currency moves. currencies, also increased this year.

Overall, according to BofA Global Research, global central banks have already raised rates 124 times so far this year, compared to 101 increases for all of 2021 and six in 2020.

The monetary policy tightening follows the worst inflation many countries have seen in decades. Consumer prices in the United States, for example, rose at their fastest pace since May 1981.

Higher rates, soaring oil prices and market turmoil all contribute to the toughest financial conditions since 2009, according to a Goldman Sachs index that uses metrics such as exchange rates, stock moves and costs to compile the most widely used indices of financial conditions.

Tighter financial conditions can result in businesses and households reducing their spending plans, saving and investing. According to Goldman, a 100 basis point tightening of conditions reduces growth by one percentage point the following year.

“The more aggressive line from central banks is adding headwinds to both economic growth and equities,” Mark Haefele, chief investment officer at UBS Global Wealth Management, told Reuters.

“Recession risks are rising as a soft landing for the U.S. economy looks increasingly difficult.