Is Recession Inevitable? Markets Signal Doubt

As the economic landscape evolves, recent analyses from Deutsche Bank Research raise significant questions regarding the likelihood of a recession in the U.S. economy. Following the intense market reactions to President Donald Trump’s announcement of “liberation day” tariffs on April 2, 2025, market participants are exhibiting skepticism about the impending economic downturn.

Market Reactions to Tariffs

The swift decline in equities following the tariff announcement—considered one of the most abrupt drops since World War II—has been a point of focus. Henry Allen, a macro strategist at Deutsche Bank, noted that the imposition of these tariffs has resulted in falling oil prices and a notable shift in the bond market. Investors began demanding higher premiums for corporate credit, indicative of heightened uncertainty, following the tariffs, while the yield curve began to steepen.

Investors’ Reluctance to Price in a Recession

Despite these reactions, Allen highlighted that investors appear hesitant to fully incorporate a recession into their market calculations. According to his analysis, “Markets clearly don’t see a recession as inevitable, particularly if the tariffs don’t come into force after the latest 90-day extension.” This belief is further reinforced by the shallow nature of the equity declines, credit spread widenings, and oil price drops compared to previous recessions.

Indicators of Market Stability

The current state of the credit markets results in a relatively subdued response compared to the distress signals typical of prior economic downturns. Allen pointed out that credit spreads in the U.S. high-yield corporate bond market have not approached the peak levels seen during non-recession scenarios in 2022, 2016, and 2011. He stated, “we haven’t even reached levels consistent with actual recessions experienced during the COVID-19 pandemic and the global financial crisis.” This indicates a certain level of market resilience, as investors navigate the uncertain waters surrounding fiscal policies and potential economic impacts.

Equity Market Trends

On the equity front, the S&P 500 index had witnessed a decline of 12.5% from its record close on February 19, 2025. However, this decrease has not been as severe as the declines observed during recent recessions, leading to discussions about the market’s general health. Allen noted that despite a month-to-date loss of 4.2%, the index showed signs of recovery, rallying 1.7% on the analysis day.

Oil Prices and Global Growth Outlook

In the oil market, the modest declines suggest that investors are not fully bracing for a significant global economic slowdown, despite myriad confounding factors. This perception emerges as markets grapple with varying international dynamics while still considering domestic policies and their outcomes. The relatively stable oil prices serve as a further indicator that confidence may remain within the markets.

The Yield Curve Dynamics

Turning to the yield curve’s behavior, it’s typical to witness a sharp steepening prior to recessions due to central banks cutting interest rates. However, Allen pointed out that the recent yield curve steepening has “less obvious” causes this time. He explained that the Federal Reserve has refrained from rapidly cutting rates amid persistent inflationary concerns, complicating the narrative surrounding yields.

Looking Ahead: Importance of Economic Data

With the current economic uncertainty, Allen underscored the significance of forthcoming economic data. Observations from the U.S. jobs report and other key economic indicators will be essential in gauging the ongoing health of the economy. He emphasized, “Investors have been reluctant to fully price in a recession because we don’t have enough evidence that one is likely.”

Conclusion

While concerns over the potential for a recession persist within financial circles, the market behaviors observed in equities, credit spreads, and oil prices convey a mixed sentiment. Investors appear to be weighing the potential implications of President Trump’s tariff policies and the broader economic context, all while holding onto cautious optimism. As crucial economic data comes to light in the coming days, market participants will remain vigilant, looking for more definitive signals regarding the U.S. economy’s trajectory.