Goldman Sachs and JPMorgan’s models show that the US bond market and stock trends indicate a significant increase in the market’s prediction of economic recession risk.
According to Bloomberg’s report on Tuesday, August 13, Goldman Sachs stated that the bond and stock markets believe there is a 41% chance of an economic recession in the United States, higher than the 29% in April. This increase is attributed to the market betting on the Federal Reserve cutting interest rates at a faster pace, and stocks, which are highly sensitive to the business cycle, showing lagging performance.
Furthermore, a similar model from JPMorgan also calculated that due to the significant repricing of US government bonds, the probability of an economic recession jumped from 20% at the end of March to 31%.
JPMorgan strategist Nikolaos Panigirtzoglou mentioned that the recession risk in their bank’s model reflects the market’s consideration of the extent of rate cuts since the employment report last month showed a slowdown in job growth.
“The US credit and stock markets seem to be out of touch with the US interest rate market,” he said. “If the next US household survey results for August are similarly weak as in July, reinforcing the recession argument, then the stock and credit markets will need to weaken significantly to catch up with the rate market.”
The employment growth data released on August 2 fell below expectations, raising concerns about the Federal Reserve waiting too long to start loosening monetary policy and sparking worries about an economic slowdown.
However, monthly job additions still exceed 100,000, and various economic health indicators do not signal an imminent economic recession. For example, the optimism among US small businesses recently reached the highest level in over two years in July.
Moreover, economists’ forecasts have not significantly increased. Since April, economists’ common prediction for the possibility of an economic recession has remained at 30%.
According to the models of Goldman Sachs and JPMorgan, the expectation of economic recession in the interest rate market is higher than that in the stock market. According to Goldman Sachs’ model, the implied change in the Federal Reserve’s benchmark interest rate over 12 months suggests a 92% chance of an economic recession in 2025, while JPMorgan’s model indicates that the change in the five-year US Treasury yield implies a 58% chance of an economic slowdown.
Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs, stated that although their market models show an increased possibility of an economic recession, their economists only believe there is a 25% chance of an economic recession.
Given that the average risk of an economic recession in any given year is 15%, Mueller-Glissmann said that 25% means this possibility is still “relatively low.”