Treasury indicators do not announce recession-April 4, 2022 14:41

Felipe Villarroel, Manager of Twenty Four Asset Management, a Vontobel AM boutique.  (Credit: DR)

Felipe Villarroel, Manager of Twenty Four Asset Management, a Vontobel AM boutique. (Credit: DR)

By Felipe Villarroel, Manager of Twenty Four Asset Management, a Vontobel AM boutique


The current modification of risky assets is a valley in the cycle

Russia invaded Ukraine almost a month ago. Markets do not yet know when and how this war will end, but rumors are growing about the outlook for a recession that will affect all or part of the world economy. Assuming that this conflict does not degenerate into a direct conflict between Russia and NATO and eventually reaches a peace agreement, we cannot believe the theory of a global recession. Rather, it interprets the current modification of the risky asset as a valley within the cycle. The potential for a recession is certainly increasing, but the indicators we have available clearly show that it should not be the first scenario adopted.

Growth slows but is stable

Growth in 2022 should exceed historical averages in most developed countries, even after adjusting forecasts following Russia’s offensive. In the US, the Fed expects growth of 2.8% this year (with some rate hikes), while the ECB expects growth of 3.7% in the euro area quite optimistically.

The potential for growth above the trend level is directly related to whether the economy is in a transitional phase between the beginning and middle of the cycle, rather than between the middle and end of the cycle. Growth in the late cycle is generally lower than the trend, which means that extrinsic shocks such as wars that plunge forecasts by 100-200 bps are likely to cause a recession. In the euro area in 2022 before the invasion, growth was expected to be close to 4%, well above the region’s historical average. A significant shock to growth does not necessarily lead to a recession.

Central banks have just begun to tighten monetary policy in developed markets. Therefore, this means that the current monetary policy situation is adaptable given the macroeconomic environment. In this context, the occurrence of a recession is an unusual phenomenon from a statistical point of view. A recession usually begins after the central bank has raised some rates to slow the economy or withdrew support measures. However, this process has hardly started.

Rising than falling rating

Since the beginning of this year, Moody’s has recorded an increase of 1.95 in the downgrade of US high yield bonds, especially a 6.7 increase in the downgrade of the US investment grade bond segment.

These are obvious signs of improvement in credit indicators. In Europe, the numbers before the Russian offensive are also very positive and have declined significantly since then, but looking at the downgrades, many of them are Russian companies or their European branches (Evraz, Rosneft, RusHydro). , All Gazprom branches in Western Europe have been downgraded.

Needs close monitoring

Finally, the labor market remains very tight, especially in the United States. With job offers and resignations hitting record highs and wages rising sharply, it’s hard to imagine a sudden reversal that would cause a recession in the near future. According to ISM surveys in manufacturing and services, executives are less concerned about worsening economic outlook than failing to do the work they need to meet demand.

In conclusion, the situation can change rapidly, and even if some signal of concern requires close scrutiny, it is unlikely that the developed markets are at stake.

The economy, businesses and consumers are all in good shape to enter 2022 and are therefore fully able to withstand the negative shocks. Growth will be lower than initially expected, but spreads are already a significant amount of bad news pricing and quite attractive in the medium term if scenarios of movement beyond potential are realized. Looks like.

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