Look around and that long awaited recession just hasn’t come, not in the U.S., and not many other places either, with the International Monetary Fund on Tuesday saying it was no longer forecasting a recession in the U.K.
“In the face of powerful shocks –including the continued effects of the Russia-Ukraine war, high inflation, surging central bank policy rates, and (more recently) the emergence of banking sector stresses — the global economy continues to move forward,” says Nathan Sheets, Citi’s global chief economist, in a note forecasting 2.4% global growth this year and 2.1% next year.
Another banking giant, HSBC, arrives at a similar conclusion about the economic backdrop — and that is the basis for its optimistic take on stocks and other risky assets.
“Continued subdued sentiment and positioning is just one of many factors that keep us risk-on in our tactical asset allocation,” say strategists led by Max Kettner, chief multi-asset strategist at the bank.
Here’s its argument. Looking at purchasing managers index data for manufacturing, new orders minus inventories for key areas including the U.S., the eurozone, Taiwan and Sweden are improving. Financial conditions also have improved, thanks to falling volatility, a declining U.S. dollar, a dip in U.S. Treasury yields and stabilization in credit spreads.
That’s not to say the strategists expect growth to suddenly accelerate — they acknowledge weakness in regional Fed surveys, for instance. But that’s actually the good news. “The fact that the global growth backdrop is certainly better than many had feared, but not sounding an all-clear results in a goldilocks environment,” says the HSBC team.
Another point the bank makes is that consensus still expects a recession, just later, and in fact deeper than before. That applies to earnings as well, with expectations of flat quarter-on-quarter earnings per share growth from S&P 500
SPX
companies in the second quarter. “So given such subdued expectations, we feel comfortable with extending our risk-on view into the second half. The bar to beat pessimistic expectations remains low,” the firm says.
The weaker dollar
DXY
should help U.S. earnings, and activity surprises will help earnings per share revisions as well.
HSBC is particularly bullish on eurozone equities given low growth expectations. The bank’s worry around the debt ceiling isn’t that a deal won’t be reached, but the possible market reaction to one.
“Of course with the recent rally in risk assets, the air is getting thinner – something that also our machine-learning models are currently indicating,” the firm says. “For example, any relief rally on a potential U.S. debt ceiling deal could be used to tactically decrease exposure in risk assets more broadly, and wait for better re-entry points (given the likely liquidity drain following any potential deal).”
Related: Who will buy deluge of Treasury bills after a debt-ceiling deal
The market
U.S. stock futures
ES00
NQ00
are lower, after the worst single session for the S&P 500
SPX
since May 2. U.K. bond yields
BX:TMBMKGB-02Y
rose after U.K. inflation at the core level was far stronger than expected.
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