In the first trading day of the new year, U.S. financial markets were bogged down by the almost universal view that a recession is approaching.
A rally for stocks fizzled within the first 30 minutes of opening gains. Gold GC00, +0.23%, a traditional haven, touched its highest level in six months, rising alongside silver SI00, +0.14% and platinum PL00, +0.57%. And 10- to 30-year Treasury yields, nestled in what’s known as the long end of the bond market, fell as investors jumped into government bonds — driving those yields down respectively to around 3.8% and 3.9%.
At the heart of the market moves was the strong sense that an economic downturn is all but inevitable at this point, following months of central bank interest rate hikes around the world — with the International Monetary Fund‘s chief Kristalina Georgieva warning that the economies of the U.S., European Union and China are all slowing simultaneously. Scion Asset Management founder Michael Burry said he expects another “inflation spike” after recession rocks the U.S., and former New York Fed President William Dudley said a U.S. economic downturn “is pretty likely.”
“Recession is what everyone is betting on,” said Ben Emons, senior portfolio manager and head of fixed income/macro strategy at NewEdge Wealth in New York. “And, the thinking is, therefore inflation will decelerate faster than what people anticipate and the Federal Reserve could move quicker to a rate cut. But the whole narrative of a recession is something that’s bothering the stock market and other asset classes because it will mean shrinking margins and earnings.”
Indeed, a much-hoped for rally in stocks around this time of the year, known as the “Santa Claus rally,” is failing to materialize, with just one more trading session left on Wednesday before the end of that seasonal period. The in-house research arm of BlackRock Inc., the world’s largest asset manager, described recession as “foretold” on Tuesday and said it is “tactically underweight” developed-market stocks, which are still “not pricing the recession we see ahead.” That’s the case even though global stocks ended 2022 down by 18% and bonds fell 16%, said Jean Boivin, head of the BlackRock Investment Institute, and others.
“We see stock rallies built on hopes for rapid rate cuts fizzling. Why? Central banks are unlikely to come to the rescue in recessions they themselves caused to bring inflation down to policy targets. Earnings expectations are also still not fully reflecting recession, in our view. But markets are now pricing in more of the damage we see—and as this continues, it would pave the way for us to turn more positive on risk assets,” Boivin and others at BlackRock Investment Institute wrote in a note Tuesday.
“Even with a recession coming, we think we are going to be living with inflation,” they said.
Interestingly, the financial market’s focus on a 2023 recession is accompanied by the view that such a downturn will eventually help cure inflation, allowing central banks to end, slow, or even reverse their monetary policy-tightening campaigns. That view was buttressed by Tuesday’s release of inflation data out of Germany, which showed that the annual rate from the consumer-price index fell by more than expected in December to a four-month low. Back in the U.S., fed funds futures traders priced in a greater likelihood of a smaller-than-usual, 25-basis point rate hike by the Federal Reserve in February.
Meanwhile, a rally in Treasurys moderated relative to earlier in the day. The 10-year Treasury yield TMUBMUSD10Y, 3.739%, a benchmark for borrowing costs, dropped back to levels last seen around Dec. 23-26, a period when conditions were “totally illiquid and no one was trading,” said Emons of NewEdge Wealth.