Market Pricing: Probability of US Recession Rising, Goldman Sachs: 41%, JP Morgan: 31%

According to models from Goldman Sachs and JP Morgan, the likelihood of a US economic recession has significantly increased.

Goldman Sachs indicates that the probability of a US economic recession in the stock and bond markets is 41%, up from 29% in April.

JP Morgan's model also shows that due to the repricing of US Treasury bonds, the likelihood of a US economic recession has risen from 20% at the end of March to 31%.

These conclusions are based on signals from the US bond market and the performance of stocks sensitive to the business cycle. Analysis points out that the recent rally in the stock market is due to market bets on the Federal Reserve taking more aggressive rate cuts, but if the upcoming economic data continues to be weak, stocks and credit markets may experience a significant decline in sync with the bond market. The market is closely watching the US CPI data for July to be released tonight.

The inflation data for PPI released in the US last night slowed down across the board, rising 2.2% year-on-year, lower than the expected 2.3% and the previous value of 2.6%. The market is optimistic about a 50 basis point rate cut by the Federal Reserve in September, and US stocks closed higher across the board.

JP Morgan strategist Nikolaos Panigirtzoglou stated that although signals from the stock market indicate a probability of an economic recession at only 20%, this probability is still higher than the "zero probability" seen earlier this year when the stock market hit new highs. This means that while the stock market does not yet consider the risk of an economic recession to be high, this risk is increasing.

"The US credit and stock markets seem to be disconnected from the US bond market," he said. "If the next set of US economic data in August is as weak as the survey results from July, the argument for an economic recession will be stronger, and at that time, stocks and credit markets may experience a significant decline to catch up with the pessimistic expectations reflected in the bond market."

According to models from Goldman Sachs and JP Morgan, the bond market has higher expectations of an economic recession compared to the stock market. Goldman Sachs' model shows that the implied change in benchmark interest rates after 12 months suggests a 92% probability of an economic recession next year, while JP Morgan's data indicates that the change in the five-year US Treasury bond yield implies a 58% chance of an economic slowdown.

The lower-than-expected job growth data released on August 2nd has raised concerns in the market about the Federal Reserve possibly waiting too long to start easing monetary policy. Despite fluctuations in job data, economists' predictions of an economic recession have not significantly increased. Since April, the market consensus prediction has remained at 30%, while in early 2023, the predicted probability of a recession had reached close to 70%. Data released by NFIB last night also shows that small business optimism in the US in July reached a two-year high, with a more positive outlook on the economy and sales prospects.

Goldman Sachs' Head of Asset Allocation Research, Christian Mueller-Glissmann, stated that although Goldman Sachs' market models show an increasing likelihood of an economic downturn, the bank's economists believe the probability of an economic downturn is only 25%, which is still relatively low