JPMorgan Model Predicts Sharp decrease in Recession Odds Across Markets

This week, concerns about a possible recession have been widespread, from Wall Street to Davos. However, JPMorgan Chase & Co. has found that the odds of an economic downturn have actually fallen sharply from their 2022 highs. This suggests that the market is not as worried about a recession as it was previously.

The firm's trading model shows that seven of nine asset classes from high-grade bonds to European stocks now have less than a 50% chance of a recession. This is a big reversal from October when a contraction was effectively seen as a done deal across markets.

Global money managers are far from bullish on the economic trajectory, with the S&P 500 still assigning a 73% probability that a recession will ensue. However, this is down from as high as 98% last year, and is consistent with an uptick in wagers on a soft landing that sparked an earlier new year rally.

After a tough year on Wall Street, bank executives are hopeful about cooling inflation and the reopening of China. These factors could help improve the economy in the coming year.

According to JPMorgan strategist Nikolaos Panigirtzoglou, most asset classes have been steadily pricing out recession risks in recent months, thanks to factors such as China's reopening, the collapse in gas prices in Europe, and larger-than-expected inflation downshifting in the US. Panigirtzoglou notes that the market now expects a much lower chance of recession than it did back in October.

JPMorgan Chase & Co. is a leading global financial services firm with assets of $2.6 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers and businesses, financial transaction processing, asset and wealth management, and private equity.

Panigirtzoglou's colleague, Marko Kolanovic, has warned that investors may be underestimating the potential pressure on stocks from a growth slowdown in the months ahead. Kolanovic cites weaker factory output and retail sales, as well as a bond rally, as evidence that the slowdown may be more severe than many are anticipating. Additionally, Federal Reserve officials have warned that interest rates are likely to remain in restrictive territory, which could further pressure the economy.

Thanks to a recent rally, the odds of a recession in the US have dropped from 33% to 18%. European markets have also suddenly become more bullish, with the EuroStoxx index reflecting a 26% probability of a recession, down from 93%. JPMorgan calculates the metrics by comparing the pre-recession peaks of various classes and their troughs during the economic contraction.

Economists are not as optimistic as they were in October, when their consensus forecast was 50%. Now, their forecast has jumped to 65%.

The bond market is sending a warning sign about a possible recession - the yield curve for Treasury bills has inverted. This happens when short-term rates are higher than long-term rates, and it's seen as a sign that investors are expecting slower economic growth.

Some investors are betting that central bankers will be able to engineer a soft landing after all, driving a bounce in recent weeks across riskier assets from emerging markets and junk bonds to meme stocks.

"I'm not saying that growth is going to be explosive,"HSBC Bank Plc strategist Max Kettner said in an interview with Bloomberg TV. "But I don't see any downside catalysts or surprises that would push growth down. So, in my opinion, the only way is up."