US economic data has reignited interest rate hike expectations, and recession bets have plummeted

As Wall Street's expectations for a recession have dimmed, markets have become vulnerable again, fearing any signs of overheating in the U.S. economy.

From high-yield credit to stocks, according to JPMorgan Chase & Co.Financial asset expectations for a recession have fallen to their lowest level since April 2022This is a sharp reversal from the "doomsday sentiment" of the past year, when recession was seen as a fact of DingTalk on the board

That means markets are increasingly influenced by economic news that portends another bout of rampant inflation, spelling trouble for rate-sensitive strategies. For many investors, the positive economic data and its potential for more policy tightening are headwinds.

Marija Veitmane, senior multi-asset strategist at State Street Global Markets, said: "I am concerned that the current good economic data is likely to perpetuate inflationary pressures. This will prevent the Fed and other central banks from cutting interest rates and could end up damaging the economy."

Steady unemployment claims and better-than-all-expected activity in the services sector last week further bolstered the Fed's stance on high interest rates, triggering a fall in US equities. Even government bond investors - one of the few markets where recession expectations are spreading wildly - are now less pessimistic, thanks to a series of stronger-than-expected data.

The inversion of the US Treasury yield curve, which was regarded as an economic warning signal, has finally begun to ease.For the past two months, traders have been scaling back their bets that the Federal Reserve will be forced to cut interest rates next year in response to a recession。

The sensitivity of markets to new data can be gauged by looking at the correlation between the S & P 500 and Citigroup's widely followed U.S. economic surprise index. The 40-day correlation between the two has fallen to its lowest point on record.This means that when the overall data from employment to manufacturing exceeds economists' expectations, the stock market will declineOn the contrary, if there is a downside surprise in the data, it will trigger a rebound

The relationship between U.S. Treasuries and data has also become more negative.Economic strength suggests weaker bond prices"We are in the'bad news is good news' phase of the cycle as the market is very concerned about another Fed rate hike," Yung-Yu Ma, chief investment strategist at BMO Wealth, wrote in a memo.

A sudden flurry of bad economic news could obviously trigger volatility in global markets, but for now,The good news may be a bigger riskIt could lead to inflation and higher policy rates, which would hurt corporate profits, depress business investment, and threaten consumers with high debt.

Cameron Crise, macro strategist at Bloomberg, said: "We are in some kind of economic and market purgatory where the curve says everything is going to hell but risk assets give us hope of a soft landing in paradise."

Fed policymakers are doing their best to dampen bets on a policy shift to easing and sensitize markets to the possibility of a rate hike. Traders have already cut their expectations for a rate cut next year to about 100 basis points, from 150 basis points in early 2023. The Fed is expected to maintain interest rates in the range of 5.25% to 5.5% at its next meeting on September 20.

Even Federal Reserve staff have ruled out a recession from their forecasts for this year as the economy grows at a steady 2 percent pace. The economy expanded at an annualized rate of 5.6 percent in the third quarter, according to a widely followed unofficial measure from the Atlanta Fed.

"I think the market is going to be skeptical until they see what a recession is really like," says James Rossiter, global head of macro strategy at TD Securities, who has mispredicted a recession this year and now expects the US economy to contract early next year. "Over the past year or so, people like me have been wrong many times to predict a recession, and the world is actually in better shape than we feared."

Investors are also reconsidering their bets on the economic downturn.Stock, credit and interest rate markets collectively see a 16 per cent chance of a recession in the next six to 12 months, down from more than 50 per cent in October, according to JPMorgan's trading model. The S & P 500 gives a 22 per cent chance of a recession, down from 98 per cent in October, while the junk bond market sees a 9 per cent chance.

Industrial foreign exchangeEconomists worry that the reversal is too strong, that the red-hot economy will push consumer price pressures beyond the comfort of the Federal Reserve. In the past half century, policymakers have never been able to achieve a soft landing, in which inflation slows while the economy stabilizes.

"The Goldilocks scenario is more likely to be a stopover, a path to better or worse," said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors."In a stronger growth environment, greater inflationary pressures should be inevitable and the market will have to cope with more rate hikes."