Market snapshot: subdued mood as recession fears grow

The UK has avoided a technical recession for now, but more voices have added to growing speculation that America is heading for a downturn in 2023. Our head of markets has the latest.

Further evidence of a slowing economy came in the form of releases showing factory orders which dropped for a second month and, in particular, as job openings fell to the lowest level in almost two years. The resilience of the labour market to date has kept the Federal Reserve on high alert in its battle against inflation, and most recent data has tended to suggest that the interest rate hiking policy is now taking a measured effect on crimping growth.

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As investors swayed towards more defensive sectors such as utilities and healthcare, markets on the whole gave up recent gains as investors reflected on the fallout from the Fed’s aggressive hiking policy. The latest economic releases do not yet fully reflect any tightening credit conditions from the recent banking turmoil, and comments from the CEO of JP Morgan Chase added to jitters as he suggested that the odds of a recession have increased and that the current pressure on the bank sector is not yet over.

At the same time, the recent hike in oil prices has further muddied the picture in throwing some doubt on the Fed’s likely reaction to another inflationary pressure. Market odds are still suggesting that one more hike remains in the pipeline, but the mood music has changed to expect some interest rate cuts before the year is out. Such expectations counter the Fed’s narrative of “higher for longer” and could lead to some disappointment if an ailing economy is not given some monetary respite.

In the meantime, and as traders begin to reign in any new positions ahead of a long Easter weekend, markets found little reason to make any progress. Each of the three main indices drifted lower, although maintaining a positive performance so far this year, with the Dow Jones now up by 0.8%, the S&P500 by 6.8% and the Nasdaq by 16%.

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Asian markets saw lower trade volumes, with holidays in China and Hong Kong. Data from Japan mirrored recent Chinese releases, with services activity growing at a fair clip, but being offset by weak factory output.

Elsewhere in the broader Asia-Pacific region, the 0.5% interest rate hike announced by the Reserve Bank of New Zealand caught some traders on the hop, especially after the recent decision by the Australian central bank to hold fire on further increases as they assess the impact of the rises which have already been made.

The immediately cautious outlook inevitably fed through to the UK, where the main indices struggled for direction in early trade. The FTSE250, largely seen as the most accurate domestic barometer, has been swinging between cumulative year to date gains and losses over recent days.

Earlier year strength, largely driven by better economic data than had been expected in the UK, has subsequently dissipated as investors struggle to identify fresh areas of growth, particularly set against a still heightened inflationary backdrop and a tightening interest rate environment. The muted opening on Wednesday leaves the index down by 0.3% so far this year.

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For the FTSE100, which is holding on to gains of 2.6% in the year to date, the mood was also subdued. The possibility of a recession in the US, from where much of the constituent's earnings are derived, has played against a positive outlook, as has the recent strength of sterling for the same reason.

Even so, some tentative and broad based buying was in evidence in early exchanges, although the strength of conviction was rather unconvincing.