Financial markets send warning: Growth slowdown ahead

By: Edward Jones
DEWITT, Mich. - July 6, 2022 - PRLog -- As we head into the second half of 2022, inflation remains front and center for consumers and policymakers, but financial markets may be looking one step ahead – to a potential economic slowdown or looming recession. As we look across equities, bonds, commodities and currencies, we see that all four of these markets may be starting to sniff out slower growth ahead.

While the probability of a recession is rising, perhaps the silver lining here is that, in our view, we don't yet see the scope for a deep or prolonged downturn. In this backdrop, markets may already have started to price in a shallow recession or at least an economic slowdown.

1. Equity markets: Defensive sectors continue to outperform

Equity markets have been perhaps the loudest in signaling a pending downturn among financial markets. The S&P 500 Index ended the first half down about 20%, in bear-market territory, which historically is a signal itself that the economy is in a recession or one is pending. Since 1950, nearly 70% of bear markets coincided with recessions1.

2. Bond markets: Yields moving lower, not higher, for now – and yield curves are flattening

In bond markets, while yields had moved dramatically higher for much of this year – driven by sharply rising inflation and Fed-tightening expectations – more recently we have seen yields move lower. The 10-year U.S. Treasury yield, for example, reached a high of nearly 3.5% in early June but ended the month around 3.0%1. This move lower in yields is likely driven by concerns around future economic growth, and perhaps also by a flight-to-safety response by investors.

3. Commodity markets: Early signs of rolling over, as global demand may soften

This year, given the elevated inflationary pressures, there were limited places to hide in markets. However, the energy sector and commodities broadly were one area that held up nicely, with WTI crude oil hitting a 10-year high this year1. Nonetheless, more recently we are starting to see commodity markets weaken again. This includes metals, food and agriculture, and even energy markets.

4. Currency markets: The U.S. dollar continues to remain a flight-to-safety asset

Finally, looking at currency markets, the one standout has been the U.S. dollar, which continues to push higher this year1. In fact, the DXY trade-weighted dollar index is now near a 10-year high, close to 1051. Historically, periods of elevated inflation would negatively impact the dollar, eroding its purchasing power. However, as markets around the globe battle inflationary pressures, and concerns about slowing growth rise, we continue to see the U.S. dollar act as a safe-haven asset for global investors.

Sources: 1. Bloomberg

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