(Refiles for a fix date of April 27, and not April 26,

By Sujata Rao and Dhara Ranasinghe

LONDON, (Reuters) – After months of focusing on the central banks’ responses to raging inflation, financial markets now realize that a global downturn could be imminent.

Sentiment depressors include the Ukraine conflict, large rises energy and metals price, the aggressive U.S. Federal Reserve’s tightening central banking policy, as well as China’s lockdown policy in cities to combat COVID.

Last week, the International Monetary Fund (World Bank) exacerbated fears about growth by reducing global 2022 forecasts by almost a whole percentage point.

With increasing pessimism among financial analysts, Deutsche Bank (ETR) Seeing an “outright”, U.S. recession before the end of 2023

The omens fly in thick and fast.

They include warnings this week from shipping groups Maersk and Kuehne & Nagel about falling container volumes, and parcel service UPS predicting e-commerce growth to cool. Deutsche Bank reported earnings Wednesday and stated that credit loss could increase “significantly”.

Data shows that U.S. home sales are at their lowest level in two years, with a weakening British consumer sentiment as well as new factory orders. This all points to slowed growth.

The investors have responded by pushing down bond yields from multi-year peak levels, driving down oil price from 14-year peaks, and dumping currencies like the Australian dollar or Brazilian real, which had, up until recently, surfed commodity boom.

Craig Inches of Royal London Asset Management, Head Rates said that the market loves to look for new big things. The market has been solely focused on inflation over the last several months. Now it is focusing more on recession.

Inches doesn’t believe Inches is in the recession group, but he thinks that central banks’ willingness to raise rates more quickly “has caused people to ask, well what does it mean for future economic growth concerns?” Do you think that this means we are heading towards a tough landing?

Despite this, global inflation is at its highest level in many decades. This could lead to tensions between growth and inflation that can last for months. Investors as well as policymakers will have to tread a fine line.

Morgan Stanley Mike Wilson, strategist at NYSE:, outlines an ‘fire-and-ice’ scenario in which the Federal Reserve will tighten its policy to slow down economic growth.

Wilson stated in a podcast that the stock market decline last week, and especially the weakness in energy and materials, was a sign of the market realizing “that we are now in the ice phase” where growth is the main concern for stocks rather than inflation and the Fed and interest rates.

The world stock market has fallen by 8%, while cyclical shares have dropped 10%. Cyclical shares are closely related to economic growth.

Graphic: IFO and recessions – https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwgnrrpo/Pasted%20image%201650963019307.png

Graphic: Cyclical stocks – https://fingfx.thomsonreuters.com/gfx/mkt/znpnemkyqvl/Pasted%20image%201650962778905.png

SHOW ME

The recession is hard to see. To interpret it, economists use several indicators.

First and foremost, the U.S. Treasury Market is to be analyzed closely. This gap between 10-year and 2-year yields should also be monitored. Inversions in the curve, where shorter-dated yields are higher than their longer counterparts, usually signify a recession in two years.

In early April, the curve was inverted and now stands at around 20 basis points. This indicates that investors are still concerned about recession fears.

While it’s too early for us to speculate on the future direction of U.S. interest rate trends, we can see that money market expectations regarding the “terminal rate” have decreased by approximately 30 bps since Friday.

Euribor futures, which are interbank rates in the Euro zone, shows that March 2024 implied yields fell below those of December 2023 last week. Implied yields can be seen dropping until 2024.

Piet Christiansen chief analyst for Danske Bank said this suggested that the ECB will be too tight, and they would (then need) to loosen monetary policy.

It is worth noting China’s 3.5% decline in the yuan during April. This raises concerns about whether authorities allow currency weakness to help support the economy.

Fathom Consulting’s China Momentum Index (unifying freight volumes and power consumption) may be worth a look. According to Premier Li Keqiang’s preference, the gauge fell from 24 February last year to 4.6% in January.

Recent lockdowns are likely to further pressure the index.

Graphic: China momentum indicator – https://fingfx.thomsonreuters.com/gfx/mkt/myvmnykdapr/Pasted%20image%201650962325785.png

COMPLICATED

Deutsche Bank aside, few expect a U.S. recession next year. Goldman Sachs, NYSE:), sees an increase in probability of 15% over the next year. This rises to 35% after two years.

Valentijn van Nieuwenhuijzen, chief investment officer at NN Investment Partners focused on the resilience of Purchasing Managers’ Indexes (PMIs), future-looking activity indicators and pent-up market for goods and service.

Graphic: Dr – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkryeodvm/Pasted%20image%201650961269566.png

His comments were positive and he stated that he was pleasantly surprised at the way corporates managed to preserve their profitability and margins. So, his base case is still a soft landing.

However, there is still uncertainty that can be a problem. BofA recommends an ‘long’ Treasuries, which basically means that it will not matter if bond prices rise.

The bank predicts that real GDP growth in the United States will peak at this time next quarter after U.S. Inflation peaked last month.

(The story is rewritten to correct the April 27 date, not April 26.