‘Risks have increased’: Grim recession fear

In recent days, data has revealed the Nasdaq 100 stock market index is underperforming at the same time as the jobs market weakened and Treasury 10-year yields dropped to the lowest point in seven months.

According to Bloomberg, yields “were around 1.5 percentage points below the three-month Treasury bill rate”, representing “the widest margin in decades and historically a reliable signal that the economy is headed for a slowdown”.

Mark Haefele, chief investment officer at UBS Global Wealth Management, told the publication the dire figures indicates the US was hurtling towards a downturn.

“Recession risks have increased,” he said. “The equity outlook is challenging.

“As the slowdown of the US economy becomes more apparent, we think investors should prepare for a peak in interest rates by considering opportunities in bonds.”

The bleak outlook has prompted many to speculate whether the Federal Reserve will now hit the brakes on interest rate rises – as the Reserve Bank of Australia did this month.

However, Don Rissmiller, a partner at the brokerage and advisory firm Strategas, told Bloomberg that even if that were to happen, “restrictive policy will continue to hit the economy with a lag”.

It comes just days after Wall Street insider Bob Michele, JPMorgan asset management’s chief investment officer, told Bloomberg Television that while “you don’t know exactly where it’s going to hit”, it was now a certainty that economic pain was coming – and fast.

Mr Michele claimed ongoing interest rate hikes – which Australian homeowners have also been subjected to here for many months – coupled with quantitative tightening from the Federal Reserve have “already broken the back of inflation”, with the economy set to weaken soon as a result.

“We think recession is inevitable by the end of the year,” he said.

“When the pain hits, when we get into recession, we’re expecting high-yield credit spreads to go to a minimum of 800 (basis points) over” comparable US Treasuries.

But what does all that doom and gloom mean for us?

AMP chief economist Shane Oliver previously told news.com.au that a downturn in the US would be “bad news” for Aussies.

“The US is the world’s biggest economy … and it does affect business and consumer confidence, and it does affect demand for our exports simply because the US is part of the global economy, although it’s not the same as China which is our biggest export market,” he explained last year.

But Dr Oliver said history had shown that Australia was able to sail through periods of serious US recessions relatively unscathed, including the GFC and the tech wreck of the early 2000s.

“Just because the US has a recession doesn’t mean we will as well, but it would have a negative impact on economic growth in Australia,” he said.

Meanwhile, last month it was revealed that New Zealand’s economy shrank more than expected in the last quarter of 2022, pushing our neighbour on the cusp of a recession of its own.

If that trend continued in this quarter, it would mean New Zealand had entered a recession six months earlier than expected by its central bank.