Is the market pricing in a U.S. recession? U.S. stocks, bonds, and oil prices are all "far from enough."

Deutsche Bank warns: The market has not fully priced in the risk of recession, pay attention to subsequent hard data performance.

On April 23, Deutsche Bank pointed out in its latest report that despite a series of reactions such as tariff policies leading to stock market declines, widening credit spreads, a steepening yield curve, and falling oil prices, the adjustment magnitude of various asset classes is still insufficient compared to historical recession periods.

This indicates that the market clearly does not view a recession as an inevitable event, especially under the expectation that tariff policies may be postponed again.

The report noted that the hard data (such as non-farm payroll data) in the coming days will be crucial; if the data confirms economic contraction, it may trigger a reassessment of recession risks in the market and spark a new wave of sell-offs.

Stock market pullback depth far less than historical recession levels

Since the tariff announcement on April 2, the S&P 500 index has fallen 13.9% from its mid-February peak, with the maximum decline reaching 18.9% at the low point on April 8.

However, the report pointed out that compared to recent recessions, the current decline is not significant.

Looking back at the last five U.S. economic recessions, the peak-to-trough decline of the S&P 500 index has exceeded the current level. In fact, this decline has not surpassed the over 25% drop triggered by recession fears in 2022, nor has it reached the sell-off at the end of 2018 (-19.8%).

This indicates that, at least for now, the stock market's decline has not reached the scale typical of recession periods.

Credit spreads still have room to widen

Similar to the stock market, the pressure signals in the credit market have not yet reached the levels seen in recent recessions, which means that if a recession does occur, there is still significant room for spreads to widen.

The report shows that the current spread of U.S. high-yield bonds (HY) is about 397 basis points, a level that is even lower than the peak in non-recession scenarios, such as 583bps in 2022, 839bps in 2016, or 876bps in 2011. Not to mention compared to actual recession periods, such as 1100bps during the COVID-19 pandemic or 1971bps during the global financial crisis (GFC).

Even considering the recession in 2001 (which was relatively mild), the high-yield spread at that time also exceeded 900bps.

Oil price decline eases, not yet reflecting severe demand shock

According to Deutsche Bank, there is a clear correlation between oil prices and economic recessions (which usually lead to demand shocks), with recessions often accompanied by falling oil prices. Of course, there are exceptions, where rising oil prices themselves are a trigger for recessionIf we exclude the recession caused by oil prices themselves and focus only on the recent recession, we can see that the current decline in oil prices is far less than during other recession periods. Since April 2, Brent crude oil prices have fallen by about 10%. Although this decline is not small, it is still significantly less compared to the nearly two-thirds drop in Brent crude oil prices during the COVID-19 pandemic and the global financial crisis.

Despite the fact that oil prices are influenced by various factors, the relatively moderate decline indicates that investors currently do not expect a sharp slowdown in global economic growth.

Ambiguous Signals of Yield Curve Steepening

A sharp steepening of the yield curve is often a common phenomenon before a recession. The report points out that in recent cycles, recessions do not begin when the curve inverts, but rather occur after the curve un-inverts and returns to a positive slope. This is usually due to central banks rapidly cutting interest rates in response to economic slowdown/recession, leading to a significant drop in front-end yields.

Currently, the market has indeed seen a similar steepening of the curve, but the reasons are less clear. The Federal Reserve is not in a hurry to cut rates, and Chairman Powell has even expressed concerns about inflationary pressures. Additionally, the current steepening of the curve is partly due to a significant rise in long-end yields, reflecting investors' doubts about the future safety of U.S. Treasuries, leading to outflows from U.S. bonds. Therefore, the driving factors behind this steepening differ from those seen before recent recessions.

It is worth noting that the current steepening of the curve is a continuation of the trend since the summer of 2023, during which the market consensus has largely been that the possibility of a "soft landing" has increased, and growth forecasts have even been revised upward. Thus, although curve steepening is associated with recessions, the current steepening may stem from various non-recession-related reasons.

Market Pricing Insufficient, Future Data Crucial

Considering all the above signs, the report concludes that the market has not fully priced in the risk of an economic recession.

The report states that this is mainly because there remains significant uncertainty about whether a recession will occur, including whether tariff policies will be extended for another 90 days and the likelihood of the U.S. reaching trade agreements with other countries to lower tariffs. In fact, in 2022, although a recession did not occur, the market (including the stock market and credit spreads) sold off more aggressively than it is currently.

Investors are reluctant to fully price in a recession due to a lack of sufficient evidence indicating that a recession is imminent; therefore, hard data in the coming days will be crucial.

The report adds that once contractionary economic data (such as a slowdown in non-farm payroll growth) appears, the market may quickly reassess, opening the door for a new round of sell-offs.Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk