September 20, 2023

Recession risks still loom for markets that have calmed down after the banking turmoil

(Reuters) – The eurozone has slipped into recession and Chinese data disappointed, warning signs for global markets were relieved that the banking sector turmoil in March did not lead to a full-blown credit crunch and a US debt-ceiling crisis has been averted.

“We are heading for a recession and it varies from region to region,” said Benjamin Jones, director of macro research at Invesco. “There is a lot of discussion and my level of confidence is quite low.”

Here’s a look at what some closely watched market indicators say about global recession risks:


The World Bank just raised its outlook for 2023 as the US and other major economies have proved more resilient than forecast, though it said this year will still be one of the slowest growth years in the past five decades.

Goldman Sachs lowered its probability of a US recession in the coming year to 25% from an already below-consensus 35%, given easing banking sector stress and the debt ceiling agreement that it believes will lead to only small cuts.

The International Monetary Fund does not expect a recession in the UK this year. A Reuters poll expects a modest recovery in the eurozone.

But the outlook is bad.

The World Bank expects growth to take a greater toll in 2024 than previously expected due to higher interest rates and tightening credit.

There is increasing talk in China of stimulus measures to support the economy. Global economic data is delivering negative surprises at the fastest rate since September, a Citi index shows.


Christine Lagarde, head of the European Central Bank, says interest rate hikes are now having a major impact on bank lending.

Credit growth slowed further in April after banks reported in the first quarter that corporate loan demand reached its highest rate since 2008 and credit conditions remained at their tightest since the eurozone debt crisis in 2011.

Shares of regional banks in the US have recovered since the March defeat and deposit outflows have eased.

But banks reported widespread tightening of credit conditions towards the end of the first quarter, before the full impact of the banking crisis was felt.

Deutsche Bank notes that historically, the Federal Reserve begins to ease policy when the willingness to borrow as measured by an index in the closely monitored Senior Loan Officer Opinion Survey approaches zero.

That measure is now deep into negative territory, not a good sign.


Labor markets in developed economies remain tight, but job losses are increasing.

According to global outplacement agency Challenger, Gray & Christmas, announced job cuts by US-based employers rose 20% in May to 80,089.

Britain’s largest broadband and mobile operator, BT Group, said last month it would cut up to 55,000 jobs by 2030 – possibly more than 40% of its workforce. Telecom giant Vodafone plans to cut 11,000 jobs worldwide in three years.

Invesco’s Jones noted that many more U.S. companies talked about layoffs in their first-quarter results.

“The tone of that is starting to worry me,” he said.

4/ WHAT STANDARDS? Companies are starting to feel the squeeze from tighter credit conditions and more expensive financing. Deutsche Bank expects an imminent wave of defaults, peaking in the fourth quarter of 2024. It predicts the highest default rates on US loans will approach an all-time high of 11.3%.

So far, the markets seem to be unaffected.

The risk premium on US and European junk bonds has fallen to early March levels, following a sharp rise due to the banking turmoil. Analysts say markets remain buoyed by defensive investor positioning and decent corporate earnings in the first quarter, though this may soon change.


Traders are not expecting any more Fed rate cuts this year, as opposed to the more than 50 basis points they bet on in March.

They still see US rates falling to around 3.9% in September 2024, from 5%-5.25% currently.

So the US Treasury yield curve remains deeply inverted, meaning that longer-dated borrowing costs are lower than shorter-dated ones — a gold-plated recession signal.

“If the curve continues to invert, this may be a sign that the market believes that more aggressive rate hikes than previously predicted will be followed by earlier and faster rate cuts,” said SEB chief European interest rate strategist Jussi Hiljanen.

(Reporting by Dhara Ranasinghe, Chiara Elisei, Alun John, Harry Robertson and Yoruk Bahceli; Compiled by Yoruk Bahceli; Graphics by Prinz Magtulis and Pasit Kongkunakornkul; Editing by Ed Osmond)

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