Global growth concerns have shot back onto the radar of financial markets as weakening U.S. economic data and growing trade tensions hurt consumer confidence and business activity.
Although recession is not the base-case scenario for economists, given underlying U.S. resilience, recent data has unnerved investors and U.S. President Donald Trump's new 25% tariffs on Mexico and Canada are exacerbating growth concerns.
A shift in the mood music is apparent across markets.
Oil prices are at their lowest since October , stocks from New York to Tokyo are retreating from recent multi-year highs and two-year U.S. Treasury yields are at their lowest since October as bond investors see increased chances of near-term rate cuts.
"One thing is essential for an economy and that's confidence, which has taken a hit," said Francois Savary, chief investment officer at Genvil Wealth Management, referring to weakening U.S. consumer and business sentiment.
"I don't think it's (recession) a done deal but it's a reason why we have decided to decrease (U.S.) equity exposure."
U.S. consumer confidence in January slumped the most in 3-1/2 years, retail sales dropped by the most in nearly two years, and Monday's U.S. manufacturing activity data showed big falls in new orders and employment.
"We don’t think we will see a (U.S.) recession but we do see a modest growth slowdown," said Joost van Leender, senior investment strategist, at Van Lanschot Kempen Investment Management in Amsterdam, adding consumers were feeling uncertain about "chaotic" U.S. policy.
Van Leender said he had trimmed U.S. equity holdings in late January and is overweight Treasuries as yields are likely to fall as the economy decelerates.
Highlighting the change in fortunes, the Atlanta Fed's GDPNow model estimate for annualised growth this quarter on Monday fell to -2.8% from +2.3% a week ago.
Analysts stress that recent U.S. data is likely to have been skewed by one-off factors such as cold weather, and strong imports in the case of the Atlanta Fed's model. But they also note that a trade war means focus is quickly shifting from inflation to the growth risks from U.S. tariffs.
China has responded to a doubling of duties on Chinese goods to 20% with additional tariffs of 10%-15% on certain U.S. imports from March 10. Europe is also in the firing line for higher U.S. tariffs, and trade-vulnerable auto stocks dropped 4% on Tuesday after the tariffs on Mexico and Canada, where many cars for the U.S. market are made. (.SXAP)
Morgan Stanley estimates that the new U.S. tariffs on China, Mexico and Canada could shave 0.7-1.1 percentage points off U.S. economic growth in coming quarters, deliver a 2.2 to 2.8 percentage point hit to Canadian growth, and push Mexico into recession.
Canadian Chamber of Commerce CEO Candace Laing warned that U.S. tariff policy was forcing Canada and the U.S. toward "recessions, job losses and economic disaster".
"Time to add a new word to the dictionary, 'Trumpcession', SEB economist Marcus Widén said in a note.
RATE CUT PRESSURE
The Canadian dollar and Mexican peso briefly hit one-month lows on Tuesday. Notably, the dollar, which has generally benefited from trade tensions, has also weakened as U.S. growth worries weigh .
Some reckon the U.S. economy could be at risk from a worrying mix of sluggish growth and relentless inflation.
Analysts said a trade war keeps pressure on central banks globally to keep cutting rates to shore up growth. Traders are now pricing in 75 basis points of U.S. rate cuts by year-end versus just one cut in mid-January when data was strong.
After ending February with their biggest monthly drop since late 2023, 10-year U.S. Treasury yields are eyeing 4% .
"The bond market is moving towards pricing a soft patch and maybe a recession," said Forvis Mazars chief economist George Lagarias.
The European Central Bank is tipped to cut rates again on Thursday and Morgan Stanley said it expects another cut in April as economic data and inflation weaken.
Even if U.S. economic data improves, analysts said the cloudier outlook was reason enough to remain cautious on equities.
Hedge funds that had snapped up global equities have fled bullish bets and put on wagers that stocks would decline, a Goldman Sachs note on Monday showed.
Consumer discretionary stocks, an economic bellwether and indicator of shoppers' purchasing power for nice-to-have products, was the worst-performing U.S sector last month, the note showed.
Friday's closely-watched U.S. jobs report takes on additional significance with growth risks in focus.
"This economic cycle is consumption-led and can only die with the labour market," said Lombard Odier's chief economist Samy Chaar. "The Fed has to be very mindful of that."
