Marketmind: Dodging A Downturn

A look at the day ahead in U.S. and global markets from Mike Dolan.

Global investors have fretted endlessly about a 2023 recession for the major global economies for more than six months. Now the year’s underway, they are having some doubts.

A big question is whether dodging a downturn at this point is good or bad news for asset prices – increasingly comfortable with the idea that slowing economies will zap inflation and allow interest rates to peak and fall.

A significant risk for current investment positioning is that recessions don’t in fact materialize this year, inflation rates remain far above 2% targets and interest rates keep rising – or at least stay high. All that then just pushes a slump out to 2024, leaving markets as fragile this year as they were in the dire 2022.

The re-opening of the world’s second biggest economy as China ends its extended ‘zero COVID’ battle this month is a critical component in that.

And Tuesday’s latest economic healthcheck showed that the severe hit to Chinese economic activity from the draconian lockdown policies was actually much less than feared.

Even though 2022’s 3% output growth was one of the weakest on record, the 2.9% rise in fourth-quarter gross domestic product over a year earlier was much faster than the 1.8% forecast.

What’s more, the weakening of December industrial output and retail sales last month was also much less than expected – with an annual drop in sales of less than 2% compared to forecasts for a drop of up to 9%.

Much more worrying for China longer term was data showing the country’s population fell last year for the first time since 1961, a historic turn expected to mark the start of a long period of decline in the number of working age people and possible staff shortages ahead.

For this year, however, the latest numbers have seen many economists revise up their 2023 GDP outlook for China and scale back expectations of further monetary easing there.

The numbers also come as many forecasters revise away assumptions of a euro zone recession this year – with a much warmer winter to date and high levels of natural gas storage seeing gas prices plummet and fears of energy outages and rationing recede.

The recession rethink was also captured by the latest Bank of America global fund manager survey on Tuesday, which showed a one-year high in the global growth outlook. The survey showed that investors’ recession expectations peaked at a net 77% of respondents in November but have fallen to 68% in January.

German investor sentiment saw a strong recovery in January, the ZEW economic research institute said on Tuesday.

As to whether all that’s good or bad for markets, it may be enough to stall the bumper start to the year – which saw the Nasdaq tech stock index record its sixth straight daily gain on Friday for the first time since 2021.

Wall St futures are set to open in the red on Tuesday after Monday’s holiday and the VIX ‘fear index’ of Wall St equity volatility has jumped back above 20 – having recorded its lowest close in a year on Friday below 30-year averages.

The BofA survey showed fund managers may have already repositioned, however, as their allocation to U.S. equities dived in January and a net 39% said they were underweight while preferring euro zone stocks.

European stocks were also in the red on Tuesday, with Chinese benchmarks lower too. The yuan fell back against a broadly higher dollar.

Japan’s Nikkei outperformed, with investors awaiting the outcome of a critical Bank of Japan policy meeting on Wednesday amid speculation of a further lifting – or even scrapping – of the central bank’s cap on government bond yields.

U.S. Treasury yields were higher on Tuesday.

The resumption of the U.S. earnings season on Tuesday is the other focus.

Markets reacted well on Friday after Wall Street’s biggest banks said they stockpiled more rainy-day funds to prepare for a possible recession, while showing caution about forecasting income growth in an uncertain economy and as higher rates increase competition for deposits.

Goldman Sachs and Morgan Stanley report later on Tuesday. JPMorgan and Bank of America Corp said on Friday they continued to add staff as the economy softens, even though Goldman laid off about 3,000 workers last week.

Key developments that may provide direction to U.S. markets later on Tuesday:

* U.S. Jan Empire Manufacturing index, Canada Dec inflation

* Bank of Japan begins two-day policy meeting. World Economic Forum in Davos, Switzerland. ECOFIN of EU finance ministers meets in Brussels

* New York Federal Reserve President John Williams speaks

* U.S. corporate earnings: Morgan Stanley, Goldman Sachs, United Airlines, Signature Bank, Citizens Financial

(By Mike Dolan, editing by Susan Fenton mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)