Chinese economy
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Stock Markets Face Rude Awakening as PMI Data Flags Recession Risk and China Struggles to Grow

By:Ilya Spivak

Global stock markets are roaring higher to end 2023 as the Fed’s embrace of interest rate cuts drives runaway gains. A rude awakening looms as PMI data warns of inescapable recession.

  • PMI data will show China’s economy is still struggling a year after its post-COVID reopening.
  • Taken together with a slow U.S. and shrinking Eurozone, recession seems inescapable.
  • Gravity-defying stock markets face a rude awakening as Fed rate cut hopes are priced in.

2023 will end with a whimper for China’s economy. The purchasing managers’ index (PMI) data due for release in the final hours of the year is expected to put the world’s second-largest growth engine at a near-standstill in December.

Activity in the manufacturing sector is seen shrinking for a third consecutive month, and the eighth in contraction mode this year. Tepid growth on the services side is seen pulling the overall economy forward, but at a snail’s pace. The fourth quarter is on pace for the weakest performance in a year.

Long COVID: China is struggling a year after reopening

That is an ominous sign because it was in December 2022 that collapsing growth and swelling public outrage finally pushed the authorities in Beijing to abandon restrictive “zero-COVID” policies and begin reopening the economy. It proved to be too little, too late as demand at home and abroad lagged behind pre-pandemic vigor.

China PMI
Source: Bloomberg

This is most unwelcome for a global economy struggling to find a way to avoid recession.

PMI readings from the United States and the Eurozone paint a bleak picture. As with China, U.S. growth has slowed to its weakest since the fourth quarter of 2022. Meanwhile, the single currency bloc was in contraction mode for a sixth month straight in December, shrinking at the fastest pace in three years.

Taken together, these three economies account for half of global output growth. That is before considering that the remaining half are mainly vendors servicing demand from the three behemoths, making them still more impactful on the worldwide business cycle. Skirting recession while they struggle seems all but impossible.

Stock market vs. global recession risk: no exit?

Analysts have taken notice. A Bloomberg survey of economists reveals that forecasts for global economic growth in 2024 and 2025 have drifted mercilessly lower for most of the year. Data from Citigroup warns that even this looks overly optimistic as economic outcomes fizzle relative to baseline forecasts.

Composite PMI: Global Growth Near Standstill
Source: Bloomberg

This stands in stark contrast with booming stock market optimism. November and December have seen a blistering recovery, erasing three months of disappointment and pushing the Morgan Stanley Capital International (MSCI) World Stock Index (ACWI) toward a 12% gain for the year. Runaway strength in the U.S. is in the driver’s seat as Wall Street averages hit record highs.

In turn, that is being powered by an embrace of interest rate cuts at the Federal Reserve. Optimism seems fragile with six 25-basis-point (bps) interest rate cuts—plus a non-negligible 42% probability of a seventh—already priced into the markets for 2024.

This warns that trouble is brewing as the calendar prepares to turn to 2024. As hopes for Fed accommodation transition from speculation to a new central-bank-approved baseline discounted by the markets, weak growth and its inherent risks—especially for financial stability—seem likely to surface.

Citi economic surprise index
Source: Bloomberg

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

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