# Economic growth risks jolt inflation-obsessed markets
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-04-27
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: Global Economic Downturn Looming Amid Inflation and War
Meta Description: Financial markets face a jolt as global economic downturn fears arise, sparked by inflation, aggressive central bank policies, and geopolitical tensions.
URL: https://financedigest.com/economic-growth-risks-jolt-inflation-obsessed-marketshtml

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(Refiles to fix date to April 27 not April 26)

By Sujata Rao and Dhara Ranasinghe

LONDON (Reuters) – After months focusing on central banks’ response to raging inflation, financial markets are being jolted into the realisation that a global economic downturn may now loom.

Sentiment dampeners include the Ukraine war, huge rises in energy and metals prices, aggressive [central bank](https://www.financedigest.com/no-santa-rally-for-markets-as-central-banks-dampen-peak-rate-hopes.html "No Santa rally for markets as central banks dampen peak rate hopes") policy tightening led by the U.S. Federal Reserve, and [China’s policy of locking down cities to ward off COVID](https://www.financedigest.com/first-foreign-covid-vaccines-head-to-china-from-germany.html "First foreign COVID vaccines head to China from Germany").

The International Monetary [Fund and World Bank](https://www.financedigest.com/bank-funding-for-renewables-stagnates-vs-oil-and-gas-report.html "Bank funding for renewables stagnates vs oil and gas – report") fanned growth fears further last week when they cut 2022 global forecasts by nearly a full percentage point.

Financial analysts too are increasingly pessimistic, with [Deutsche Bank](https://www.financedigest.com/deutsche-bank-equity-bear-market-rally-will-stretch-into-2023-dollar-weaker.html "Deutsche Bank: Equity bear market rally will stretch into 2023, dollar weaker") seeing an “outright” U.S. recession by end-2023.

Omens are flying in thick and fast.

They include [warnings this week from shipping groups](https://www.financedigest.com/uk-report-warns-of-impact-of-islamist-groups-in-prisons.html "UK report warns of impact of Islamist groups in prisons") Maersk and Kuehne & Nagel about falling container volumes, and parcel service UPS predicting e-commerce growth to cool. Deutsche Bank, reporting earnings on Wednesday, flagged credit [losses could rise](https://www.financedigest.com/uk-card-fraud-losses-climbed-18-percent-in-2015-largest-rise-in-europe.html "UK CARD FRAUD LOSSES CLIMBED 18 PERCENT IN 2015, LARGEST RISE IN EUROPE") “significantly.

On the data front, U.S. new home sales hitting two-year lows, weakening British and German consumer sentiment and new factory orders all point to [slowing growth](https://www.financedigest.com/uk-recruiters-slow-pace-of-pay-growth-in-march-rec-survey-shows.html "UK recruiters slow pace of pay growth in March, REC survey shows") momentum.

Investors have reacted by pushing bond yields off recent multi-year highs, driving down [oil prices from 14-year peaks and dumping currencies such as the Australian dollar](https://www.financedigest.com/oil-slumps-on-economic-data-stronger-u-s-dollar.html "Oil slumps on economic data, stronger U.S. dollar") and Brazilian real that had, until recently, surfed the commodity boom.

The market likes to try and look to the [next big](https://www.financedigest.com/finance-is-the-next-big-sector-to-be-ubered.html "Finance is the next big sector to be Uber’ed") thing,” said Craig Inches, head of rates at Royal London Asset Management. For the last few months, it has been focused purely on [inflation but now it’s starting to focus on recession.”](https://www.financedigest.com/high-inflation-recession-risk-widen-ecb-dilemma.html "High inflation, recession risk widen ECB dilemma")

Inches is not in the recession camp, but reckons central [banks’ determination to go faster with rate](https://www.financedigest.com/bank-of-england-set-to-hike-to-4-as-rate-peak-looms.html "Bank of England set to hike to 4% as rate peak looms") rises “has made people think, well, what does that mean for future growth concerns? Does that mean we are [moving towards](https://www.financedigest.com/investment-advice-moving-towards-a-new-model.html "Investment advice – moving towards a new model") a harder landing?

Still, with global inflation at multi-decade highs, the tensions with growth may play out over months, forcing [investors and policymakers alike](https://www.financedigest.com/digbeth-is-simply-divine-to-young-urbanites-and-investors-alike.html "Digbeth is simply Divine to young urbanites and investors alike") to walk the thin line between the two.

Morgan Stanley strategist Mike Wilson outlines a ‘fire and ice’ scenario, where the Federal Reserve tightens policy into an economic slowdown.

Last week’s stock market selloff, especially weakness in materials and energy, were signs “of the market’s realization that we are now entering the ‘ice phase’ where growth becomes the primary [concern for stocks](https://www.financedigest.com/oil-near-flat-as-us-crude-stock-draw-contends-with-economic-concerns.html "Oil near flat as US crude stock draw contends with economic concerns"), rather than inflation, the Fed, and interest rates,” Wilson said in a podcast.

World stocks have fallen 8% this month, but cyclical shares, closely correlated with [economic growth](https://www.financedigest.com/addressing-the-credit-gap-to-unlock-economic-growth-in-africa.html "Addressing the credit gap to unlock economic growth in Africa"), have lost 10%.

![](https://onlineworldnews.com/wp-content/uploads/2022/04/95.jpg)

Graphic: IFO and recessions – https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwgnrrpo/Pasted%20image%201650963019307.png

![](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/94-1736815816985-compressed.jpg)

Graphic: Cyclical stocks – https://fingfx.thomsonreuters.com/gfx/mkt/znpnemkyqvl/Pasted%20image%201650962778905.png

SHOW ME

Reading the recession tea leaves is not easy, and economists use a raft of indicators, including signals from equity and [bond markets](https://www.financedigest.com/how-will-the-ecb-contain-fragmentation-risk-in-euro-area-bond-markets.html "How will the ECB contain fragmentation risk in euro area bond markets?"), to interpret the outlook.

The foremost is the U.S. Treasury market, especially the closely-watched gap between 2- and 10-year bond yields. An inversion in this curve — when shorter-dated yields rise above [longer counterparts — usually means](https://www.financedigest.com/why-fundraising-no-longer-means-kissing-a-lot-of-frogs.html "Why fundraising no longer means kissing a lot of frogs") a recession within two years.

The curve inverted in early-April and is now around 20 basis points, levels that show recession fears remain on investors’ minds.

It is probably too early to say a rethink is underway on where U.S. interest rates might top out, but money market expectations for the so-called terminal [rate have eased](https://www.financedigest.com/german-inflation-rate-to-ease-over-course-of-2023-econ-minister.html "German inflation rate to ease over course of 2023 – econ minister") since Friday by around 30 bps.

Similarly, futures on the [euro zone](https://www.financedigest.com/euro-zone-economic-sentiment-rises-in-january-to-seven-month-high.html "Euro zone economic sentiment rises in January to seven-month high") interbank rate, Euribor, show implied yields for March 2024 fell below December 2023 yields last week, and implied yields are seen falling until end-2024.

That suggests “(the ECB) will tighten too much, so they will (then) need to ease monetary policy”, said Danske Bank chief analyst Piet Christiansen.

Above all, worth noting is China, where a 3.5% [yuan decline in April raises questions on whether authorities are permitting](https://www.financedigest.com/permitted-share-of-chinas-yuan-in-russian-wealth-fund-doubled-to-60-finance-minister.html "Permitted share of China’s yuan in Russian wealth fund doubled to 60% -Finance Minister") currency weakness to support the economy.

Fathom Consulting’s China Momentum Index, unifying freight volumes, power consumption and [bank loans](https://www.financedigest.com/georgias-tbc-bank-slashes-loan-decision-time-with-fico-solution.html "Georgia’s TBC Bank Slashes Loan Decision Time with FICO Solution"), may bear watching. The gauge, reportedly favoured by Premier Li Keqiang, fell to 4.6% in January, from 24 last February.

Latest lockdowns will likely pressure the index further.

![](https://onlineworldnews.com/wp-content/uploads/2022/04/93.jpg)

Graphic: China momentum indicator – https://fingfx.thomsonreuters.com/gfx/mkt/myvmnykdapr/Pasted%20image%201650962325785.png

COMPLICATED

Deutsche Bank aside, few expect a U.S. recession next year. Goldman Sachs for instance [sees a 15% probability over the next](https://www.financedigest.com/britains-next-sees-lower-profit-in-2023-as-consumer-outlook-darkens.html "Britain’s Next sees lower profit in 2023 as consumer outlook darkens") year, rising to 35% over two years.

Valentijn van Nieuwenhuijzen, [chief investment officer](https://www.financedigest.com/impact-com-appoints-new-chief-people-officer-to-lead-people-growth-and-excellence.html "impact.com Appoints New Chief People Officer to Lead People Growth and Excellence") at NN Investment Partners, pointed to the resilience of Purchasing Managers’ Indexes (PMIs), forward-looking activity indicators, and pent-up demand for goods and services.

![](https://onlineworldnews.com/wp-content/uploads/2022/04/92.jpg)

Graphic: Dr Copper – https://fingfx.thomsonreuters.com/gfx/mkt/dwpkryeodvm/Pasted%20image%201650961269566.png

We have been [positively surprised how well corporates were able to protect their margins and profitability…so our base case](https://www.financedigest.com/italy-probes-meta-over-abuse-of-position-in-music-rights-case.html "Italy probes Meta over abuse of position in music rights case") remains a soft landing,” he said.

Still, the uncertainty is [bringing some money back](https://www.financedigest.com/trump-charges-bring-new-york-zombie-case-back-to-life.html "Trump charges bring New York ‘zombie case’ back to life") to government debt; BofA for instance recommends a ‘long’ Treasuries position, essentially a bet bond prices will rise.

U.S. [inflation peaked last month and real GDP growth is set](https://www.financedigest.com/aussie-supermarkets-set-to-capitalise-on-high-inflation-but-softer-demand-ahead.html "Aussie supermarkets set to capitalise on high inflation, but softer demand ahead") to peak this quarter, the bank reckons.

(The story refiles to fix date to April 27 not April 26.)

(Reporting by Sujata Rao, Dhara Ranasinghe; additional reporting by Yoruk Bahceli and Jamie McGeever; Editing by Emelia Sithole-Matarise)


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