The market is actually pricing an average scenario, is not pricing a recession, is not pricing a growth resumption of the economy. It is very undecided, and every new coming data will clarify the market picture and will indicate the market direction.

Market uncertainty can be seen in the first chart that shows the Global PMI (The Purchasing Managers' Index consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding >50, staying the same =50, or contracting <50) and the China PMI. The blue line indicates the Global one that in the last period has stabilised below 50 which is slightly encouraging, but it may be due to China reopening that is very strong. At the same time, in Chart 2, the recession risk is rising, it has touched the 20% mark. Since the ‘80s there has always been a recession (except once, 2011) after the indicator exceeded 20%.

Another important indicator to monitoring before a possible recession is the index of the banks’ lending standards, the conditions necessary to obtain a loan. Currently these standards have reached levels similar to those that preceded previous recessions (Chart 3).

When these standards rise, is more difficult for Businesses and Households obtain a loan or a mortgage, consequently, investments (CAPEX) drop as shown in Chart 4.

As we discussed last year the spread between the 10 and the 2 years is negative, currently is at the lowest level since ‘80s. Whenever we reached this level a recession has always ensued 18-24 months after. The possibility of recession is second half ’23 – first quarter ’24 (Chart 5).

There are some positive aspects, the first is on PMI, over 70% of countries are showing positive month over month PMI change and this could signal that the bottom has been reached and there may be a stabilisation or further improvement. As mentioned above, much will depend on China.

The very positive data is the services PMI (Chart 6), which is green everywhere besides the US, but US has a strong positive month over month change. We are still growing on the services side.

The other aspect are the bank deposits (Chart 7) of Households that are much above the trend and this could support consumption for several months.

This increase over trend was driven thanks to pandemic relief and the strength of the labour market. Chart 8 shows the reasons for the robustness of the labour market. The main drivers are inflation (orange) and employment dynamics (red). Since the outbreak of the pandemic there have been major changes within the US employment dynamics such as: lowering the average age due to retirement, skill level increased baby boomers and part-time job at an all-time low. The latter phenomenon occurred due to economic reasons; it pushed average wage growth even higher and reduced the difference in wage growth between full-time and part-time to minimal levels (Chart 9), hence keeping nominal wage growth strong.

Looking forward, the Kansas City FED in a recent research published a picture (Chart 10) of the Labour Market Condition Indicator (LMCI) which is a proprietary indicator that they have built using 24 different indicators. It shows that when the index turns negative wage growth starts to decelerate. Since last month the line is in negative territory, so probably, in next few quarters we will see a weaker job market.

Shifting the focus to corporate balance sheets, here too we can see a strong impact generated in part by pandemic relief and strongly by the record-low interest rates that have characterised recent years. The Chart 11 shows the explosion of Corporate Margins, which, however, with the massive FED’s monetary tightening will revert to the mean in the coming years.

Finally, on the Housing market we have reached the worst affordability level according to Goldman Sachs (Chart 12) and the percentage of the Household income that is been used to finance a mortgage is close to an all-time high (Chart 13). This is a big drag in term of home demand, currently the housing market is completely frozen and, as we said last month, only low rates and/or lower house prices can change the situation.

To conclude and emphasise once again how directionless and governed by uncertainty the market is, let us focus on these two pictures.

The first Chart (14) shows the Valuation Spreads within the sectors, it says that sectors are priced as if we are chugging along, when Intra-Sector valuation spreads are around the historical average level, it means that the status-quo is generally priced-in. It looks to us as if there is no clear opportunity at the aggregate level.

The second Chart (15) shows the Expected Return in the market. The red line is the median, we are basically sitting at around the fair valuations across sectors. The Expected Return average for each sector is around 0, which means market is at fair value.