Wall Street Fears a Too-Hot Economy as Recession Bets Plunge

From high-yield credit to equities, the odds of an economic downturn priced into financial assets have fallen to the lowest since April 2022, according to JPMorgan Chase & Co. It’s a big reversal from the doom and gloom of the past year, when a recession was effectively seen as a done deal.

Solid jobless claims figures on Thursday and service-sector activity topping all forecasts on Wednesday, for example, reinforced the case for the Federal Reserve to keep rates elevated, fueling a drop in equities. One way of thinking about just how sensitive the market is to fresh economic data: the link between the S&P 500 and Citigroup Inc.’s widely followed surprise index for the US economy.

“We’re in the ‘bad news is good news’ part of the cycle and the reason is because the market is quite concerned about the Fed raising interest rates again,” Yung-Yu Ma, chief investment strategist at BMO Wealth, wrote in a note. With the US economy humming along at a clip of 2%, even Fed staff have written out a recession from their forecasts for this year. One widely-followed, unofficial tracker from Atlanta Fed has the US economy expanding 5.6% on an annualized basis in the third quarter.

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