If a recession is coming, why are sharemarkets suddenly excited?

Sharemarkets around the world are up big to start the year, while crypto is on another tear. Weren’t we supposed to be in a recession? Duncan Greive explains.

Economist Shamubeel Eaqub sounded grim on Newshub last week. “I think we’re probably in recession already,” he said, attributing it to low consumer confidence which manifested in reduced retail spending in the lead-up to Christmas. It was followed by news that New Zealand’s business confidence hit a low not seen since Richard Nixon was in the White House. Then food price increases were announced as hitting levels not seen since Nothing Compares 2 U (banger) topped our charts in April of 1990.

Ths is all why Reserve bank Governor Adrian Orr told us “cool your jets” while cranking up interest rates in November. He has admitted to attempting to deliberately engineer a recession, with all the accompanying unemployment and business failures, to try and get stubbornly high inflation under control. It’s little wonder Jacinda Ardern took one look at the year and said “no thank u”.

With fresh bad news dropping like new Shein styles, you would expect that asset prices would be doing the same thing. Shares are a vote of confidence in the future prospects of business, and business prospects are bad, right? Cryptocurrencies are a bet that a new decentralised global financial system can be built, and 2022 seemed to prove that many of the main characters in its world were extravagant con artists. Which also seems bad.

The weird news

The buzzy thing is that none of what you might expect is happening. The NZX50 has risen almost 500 points, or more than 3% so far in 2023. That’s nice, but actually underperforms a number of key global markets. The Australian Financial Review notes that the Australian sharemarket is off to its second best start in more than three decades, with nine consecutive positive sessions leading to a rise of more than 7%. The Nasdaq composite is up over 9% this year. Even London’s FTSE 100, battered by Liz Truss’s avant garde economics, has managed a decent gain.

All that pales with what’s happening in crypto markets. Remember, 2022 could hardly have gone worse for the embattled digital money. A succession of disasters struck previously high profile firms like Three Arrows Capital and Terra, culminating in the stunning, cinematic collapse of FTX, run by the charismatic cartoon villain Sam Bankman-Fried. The only bright spot was the switching of the popular Ethereum currency from proof of work to proof of stake, thus eliminating the associated carbon emissions. But even that barely moved the needle on a long slow yearlong decline.

Yet crypto is having a roaring start to the year, leaving sharemarkets in its dust. Bitcoin is up 35% or almost $10,000 so far this year. Ethereum started the year under NZ$2,000 and has breached $2,500 for the first time since SBF posted bail, for a 32% gain on the year. Even FTT, the coin associated with Bankman-Fried’s disgraced punchline firm FTX, is in on the action, rising almost 8% in 2023. 

Why is this happening? And can it continue?

It’s important to note that 2022 was an awful year for almost all asset prices. Stubbornly high inflation led central bankers all over the world to crank up interest rates, which laid waste to everything from house prices to your KiwiSaver balance. So this recovery still has some way to go to get near clawing back those losses. 

But it is connected to that bad year. What’s driving all these prices up is the same factor which drove them down in the first place. Central banks respond to inflation data, and in many markets it’s starting to look like we might be past the peak. US CPI data showed headline inflation had its first decline since 2020, and at 6.5% is well down from its peak of over 9% in June. 

New Zealand reports inflation on a quarterly basis, with September’s data showing a very slight decline in price rises. The December quarter report is due tomorrow, and should show definitively whether Orr’s stern words and hard moves have made a sufficient dent in our collective behaviour (that bad retail spending from December is giving cause for optimism that it might). Everyone would much rather the so-called “soft landing”, where we pull inflation back to normal by voluntarily buying less stuff, rather than because we have no choice to hold back because we have nothing to spare, due to the cost of paying our mortgages and other debt. 

Markets here and overseas suggest that investors are betting that some of the predicted interest rate hikes may not eventuate. That some combination of business pessimism and Hipkins’ promise to focus on “bread and butter” hip pocket politics might indicate that we’ve got it under control and thus allow the Reserve Bank to cool its own jets. Economies are science and art; paradoxically, the more businesses and shoppers think things are going to go south, the more we restrain ourselves, and the less the Reserve Bank needs to restrain us. This in turn makes investors take a perverse sense of heart from how bad we think things are going to get, because they might get better sooner. 

It all means that Eaqub might be right about our being in recession already, but that the worst of our pessimism will be overblown. All eyes on our inflation data tomorrow – it will tell us a lot about how 2023 will play out from here, and in turn how markets might travel.


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