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. That 40-day correlation has tumbled to the most negative on record, meaning that when big-picture readings from employment to manufacturing come hotter than economists expect, stocks fall. Conversely a downside surprise triggers a rally.

A sudden flurry of bad economic news clearly has the potential to cause global volatility. But for now, good news may be the bigger risk, bringing with it inflation and higher policy rates that would hurt corporate earnings, crimp business investment and threaten consumers with high debt loads.“And so we are left in a sort of economic and market purgatory, with the curve saying everything is going to hell but risky assets holding out hope of a nirvana-like soft-landing.

“I think markets are going to be skeptical of recessions until they see the whites of its eyes,” said James Rossiter, head of global macro strategy at TD Securities. He now expects a US economic contraction early next year, after being caught out this year. “Too many times this last year or so, people like me have cried wolf on recession forecasts, only to see the world turn out better than feared.

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