By Wayne Cole
SYDNEY (Reuters) – Stock markets fell and bonds rallied in Asia on Monday as fears that the United States could be headed for a recession triggered mass risk aversion and bets that interest rates would rise. will have to fall sharply and quickly to support growth.
Investors started where they ended on Friday, sending Nasdaq futures down 1.87%, while S&P 500 futures fell 1.22%.
MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.7%, while Japan’s Nikkei fell another 5.5% to hit seven-month lows.
Yields on Japanese 10-year bonds fell sharply 17 basis points to their lowest level since April at 0.785% as markets radically reconsidered the prospect of another hike by the Bank of Japan.
Treasury bonds were in demand, with 10-year yields falling to 3.755%, the lowest since mid-2023.
Two-year yields fell 50 basis points last week to 3.82% and could soon fall below 10-year yields, turning the curve positive in a way that has foreshadowed recessions in the past.
The worryingly weak July payrolls report saw markets price a nearly 70% probability that the Federal Reserve would not only cut rates in September, but also ease by 50 basis points. Futures imply cuts of 155 basis points this year, with a similar amount in 2025.
“We have increased our 12-month recession probabilities by 10 percentage points to 25%,” Goldman Sachs analysts said in a note, although they thought the danger was limited by the enormous scope the Fed had to ease policy.
Goldman now expects cuts of 0.25 percentage points in September, November and December.
“The premise of our forecast is that job growth will rebound in August and the FOMC will consider cuts of 25 basis points 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 50 basis point cut in September would be likely.”
JPMorgan analysts were even more pessimistic, assigning a 50% probability to a US recession.
“Now that the Fed appears to be materially behind the curve, we expect a 50 basis point cut at the September meeting, followed by another 50 basis point cut in November,” said economist Michael Feroli.
“In fact, easing between meetings could be argued, especially if the data softens further – although Fed officials may worry about how such a move could be (mis)interpreted.”
LOOKING FOR SAFE HAVENS
Investors will get a read on services sector employment from the ISM non-manufacturing survey due on Monday, and analysts expect a rebound to 51.0 after June’s unexpected drop to 48.8 .
This week we have earnings from industrial benchmark Caterpillar and media giant Walt Disney, which will provide more insight into the consumer and manufacturing situation. Health heavyweights like weight-loss drugmaker Eli Lilly are also reporting.
The huge drop in Treasury yields also overshadowed the US dollar’s usual safe-haven appeal and dragged the currency down about 1% on Friday.
On Monday morning, the dollar fell another 0.6% against the Japanese yen to 145.53, while the euro held firm at $1.0920.
The Swiss franc was one of the main beneficiaries of the risk-on rush, with the dollar near a six-month low of 0.8571 francs.
“The change in expected interest rate differentials relative to the US has outweighed the deterioration in risk sentiment,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.
“If the recession narrative plays out, we expect this to change and the dollar to recover as safe haven demand becomes the dominant driver in currency markets.”
Investors also increased bets that other major central banks would follow the Fed’s lead and ease more aggressively, with the European Central Bank now forecasting a 67 basis point reduction by Christmas.
In commodity markets, gold fell to $2,421 an ounce, perhaps hurt by investors taking profits to cover losses elsewhere. [GOL/]
Oil prices rose amid concerns about an escalating conflict in the Middle East, although concerns about demand saw it fall to eight-month lows last week. [O/R]
Brent gained 27 cents to $77.08 a barrel, while U.S. crude rose 23 cents to $73.75 a barrel.
(Reporting by Wayne Cole; Editing by Stephen Coates)
