SYDNEY, Aug 5 — Share markets slid and bonds rallied in Asia today as fears the United States could be heading for recession triggered mass risk aversion and wagers interest rates will have to fall sharply, and quickly, to support growth.
Investors began where they finished on Friday by knocking Nasdaq futures down 1.87 per cent, while S&P 500 futures dropped 1.22 per cent.
MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.7 per cent, while Japan’s Nikkei shed another 5.5 per cent to hit seven-month lows.
Japanese 10-year bond yields fell a steep 17 basis points to the lowest since April at 0.785 per cent as markets radically reconsidered the prospect of another hike from the Bank of Japan.
Treasury bonds were in demand with 10-year yields down at 3.755 per cent, the lowest since mid-2023.
Two-year yields sank 50 basis points last week to 3.82 per cent and could soon slide below 10-year yields, turning the curve positive in a way that has heralded recessions in the past.
The worryingly weak July payrolls report saw markets price in a near 70 per cent chance the Federal Reserve will not only cut rates in September, but ease by a full 50 basis points. Futures imply 155 basis points of cuts this year, with a similar amount in 2025. “We have increased our 12-month recession odds by 10pp to 25 per cent,” said analysts at Goldman Sachs in a note, though they thought the danger was limited by the sheer scope the Fed had to ease policy.
Goldman now expects quarter-point cuts in September, November, and December.
“The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks,” they added. “If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September.”
Analysts at JPMorgan were even more bearish, subscribing a 50 per cent probability to a US recession.
“Now that the Fed looks to be materially behind the curve, we expect a 50bp cut at the September meeting, followed by another 50bp cut in November,” said economist Michael Feroli.
“Indeed, a case could be made for an inter-meeting easing, especially if the data soften further — although Fed officials might worry about how such a move could be (mis)interpreted.”
Investors will get a read on employment in the service sector from the ISM non-manufacturing survey due later today and analysts are hoping for a rebound to 51.0 after June’s unexpected slide to 48.8.
This week has earnings from industrial bellwether Caterpillar and media giant Walt Disney, which will give more insight into the state of the consumer and manufacturing. Also reporting are healthcare heavyweights such as weight-loss drugmaker Eli Lilly.
The huge drop in Treasury yields had also overshadowed the US dollar’s usual safe-haven appeal and dragged the currency down around 1 per cent on Friday.
Early today, the dollar was off another 0.6 per cent on the Japanese yen at 145.53, while the euro was holding firm at US$1.0920.
The Swiss franc was a major beneficiary of the rush from risk, with the dollar near six-month lows at 0.8571 francs .
“The shift in expected interest rate differentials against the US has outweighed the deterioration in risk sentiment,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.
“If the recession narrative takes hold in earnest, we would expect that to change, and the dollar to rebound as safe-haven demand becomes the dominant driver in currency markets.”
Investors had also increased wagers other major central banks would follow the Fed’s lead and ease more aggressively, with the European Central Bank now seen cutting by 67 basis points by Christmas.
In commodity markets, gold pulled back to US$2,421 an ounce , perhaps undermined by investors taking profits to cover losses elsewhere.
Oil prices bounced amid concerns about a widening conflict in the Middle East, though worries about demand had seen it sink to eight-month lows last week.
Brent gained 27 cents to US$77.08 a barrel, while US crude rose 23 cents to US$73.75 per barrel. — Reuters
