These indicators indicate the risk of an economic recession emerging, but the alarm has not been sounded yet

According to the Wisdom Financial APP, disappointing US employment data has shaken confidence in a soft landing in the US, leading to a global stock market crash, and bets on a Fed rate cut have soared. In addition, investors abandoning the popular yen carry trade is also a key reason for the sell-off, making the impact of asset prices on economic prospects more complex.

The possibility of an economic recession is difficult to determine. Goldman Sachs has raised the possibility of a US economic recession to 25%. JPMorgan believes there is a 35% chance of it starting before the end of the year. Various indicators will provide different insights, and here are five closely watched market indicators reflecting global recession risks:

1. Data Puzzle

Due to a significant slowdown in hiring, the US unemployment rate jumped to a nearly three-year high of 4.3% in July. This data, along with triggering the "Sam Rule," has raised concerns about a recession. Historically, when the 3-month rolling average unemployment rate is 0.5 percentage points higher than the low point of the previous 12 months, it indicates the beginning of a recession.

However, many economists believe that the data may be distorted by immigration and Hurricane Beryl, exaggerating the reaction to the data. The better-than-expected initial jobless claims data released this Thursday also supports this view, leading to a rise in the stock market.

Dario Perkins, Global Macro Director at consulting firm TS Lombard, said, "Employment is still growing. If you start to see employment turn negative, that would be more worrying that a real recession is starting."

The US economy grew at an annualized rate of 2.8% in the second quarter, double that of the first quarter, and comparable to pre-pandemic levels, with service sector activity indicating continued growth.

Apart from the US, business activity indicators show sluggish economic growth in the Eurozone. Citigroup's Economic Surprise Index shows that negative surprises from global economic data are approaching the highest levels since mid-2022.

2. Corporate Risks

The MSCI Global Stock Index from Morgan Stanley Capital International (MSCI) has fallen more than 6% from its July record high, while the US S&P 500 Index has dropped over 4% so far in August. However, analysts believe that global stock markets have still risen by around 7% this year, showing no signs of an economic recession.

Goldman Sachs estimates that for every further 10% drop in US stocks, next year's economic growth will decrease by nearly 0.5 percentage points.

Analysts say that credit conditions may prove to be more important. They point out that although corporate bond risk premiums over government bonds have widened in Europe and the US, they are adjusting from historically tight levels, and the trend is not yet sufficient to indicate high recession risks.

According to data from Bank of America, the recession expectations implied by the difference between US investment-grade bond and US Treasury yields are about half for 2022-2023

3. Rate Cut

Stimulated by the US employment data and the relatively dovish stance of the Federal Reserve, traders currently expect the US to cut interest rates by around 100 basis points before the end of the year.

This is lower than the over 130 basis points expected earlier this week, but it is double the approximately 50 basis points expected on July 29. The market also anticipates a probability of over 50% for a significant 50 basis points rate cut in September.

Major banks have also increased their expectations for the Fed's interest rate cuts this year. Steve Ryder, portfolio manager at Aviva Investors, mentioned that the Fed may cut rates three times this year, but given the uncertainty in the evolution of economic data, the market is also pricing in the possibility of further rate cuts by the Fed.

Furthermore, traders believe that the European Central Bank is likely to cut rates three more times this year, whereas previously they did not see a high likelihood of a second rate cut in mid-July.

4. Yield Curve

The rate cut bets have led to a sharp drop in short-term US Treasury yields, and the curve tracking the difference between 10-year and 2-year US Treasury yields turned positive on Monday for the first time since July 2022.

Although an inverted yield curve has historically been seen as an excellent predictor of an impending economic recession, as a recession approaches, the yield curve often reverts to normal.

However, due to the record length of inversion in this cycle and the absence of a recession, most strategists surveyed by Reuters earlier this year no longer consider it a reliable recession indicator. Subsequently, the yield curve started inverting again, dropping to -5 basis points on Thursday.

5. Dr. Copper

Named for its ability to predict economic trends, "Dr. Copper" fell to a four-and-a-half-month low this week, firmly placing the current economic situation on the recession watchlist.

The three-month copper price on the London Metal Exchange is currently around $8,750 per ton, down about 20% from the record high in May, reflecting the market's pessimistic sentiment towards the global economic outlook As another barometer of global demand health, oil prices are approaching lows seen in recent months. However, concerns about the potential supply squeeze from the Middle East tension have somewhat limited the decline in oil prices.