Digital Zeitgeist – Recession Fears Return As Banking Turmoil Grows
Recession Risks Revisited: Is An Economic Slowdown on the Horizon?
In the last few weeks, the global markets have experienced a dramatic shift in outlook due to the banking turmoil sparked by the failure of U.S. lenders Silicon Valley Bank (SVB) and Signature Bank. Credit Suisse’s rescue of the two banks and the ensuing market turmoil has re-ignited lingering fears of a possible recession. With traders now betting the Federal Reserve is practically done hiking interest rates, and optimism that followed China’s economic reopening and tumbling energy prices early this year dimming, it is important to take a closer look at the potential recession risks and how they can be avoided.
1/ Central Bankers Closer Monitoring of Potential Banking Stress
Central bankers are closely monitoring the potential for banking stress, on top of lending conditions that were already tightening, to trigger a credit crunch. Fed chief Jerome Powell believes financial conditions have likely tightened more than traditional measures indicate. European Central Bank boss Christine Lagarde has also said the market turmoil may help fight inflation. Goldman Sachs reckons the tightening in bank lending standards it expects could subtract at least 0.25 to 0.5 percentage points from 2023 U.S. economic growth, equivalent to the impact of another 25-50 bps of Fed rate hikes.
2/ Rate Cuts Not Hikes
As the outlook darkens, traders are betting on another Fed rate hike is a coin toss, with over 50 bps worth of rate cuts priced by year-end. European Central Bank (ECB) rates are seen peaking at around 3.4%, down from over 4% in early March. This has pushed shorter-dated borrowing costs down. U.S. two-year bond yields have dropped 80 bps in March, so yield curves are less inverted than prior to SVB’s collapse.
3/ Bank Stock Rout
World shares down just 0.1% in March and still sitting on gains this year seem to signal little recession risk, but worries are mounting under the surface. Global bank stocks, which had outperformed the MSCI World Stock Index before the turmoil, are down nearly 15% this month. Sectors sensitive to the growth outlook such as real estate and oil and gas are also now underperforming. Banking woes have also pushed up the risk premium on corporate debt.
4/ Dr. Copper
Copper, nicknamed “Dr Copper” for its track record as a boom-bust indicator, is still up 7% this year. But it has lost some of its early-January gusto, reflecting market uncertainty and as demand from China – the world’s largest commodity consumer – hasn’t rocketed as expected after its re-opening. The price ratio of copper to gold – seen as a gauge of risk appetite – hit its lowest in nearly seven months in March as investors ditched assets more closely linked to the underlying economy for safe havens.
5/ What Recession?
Data is still delivering positive surprises at the highest rate since May 2022, a Citi index shows, suggesting economic statistics are not yet flashing a recession warning. U.S. and Euro Zone business activity meanwhile accelerated more than expected in March.
Conclusion
Though the signs of a potential recession may not yet be clear, investors should stay vigilant and prepare for the worst. The banking turmoil and market pullback have re-ignited recession fears, and while the underlying data may not yet be showing any signs of a recessionary environment, it is important to recognize that the situation could be much worse than the data indicates. With the right precautions and an eye for the warning signs, investors can make the necessary adjustments to their portfolios and avoid the worst of any potential recession.
online sources: reuters.com, theguardian.com