A Recession May Be Delayed, Not Avoided

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Equity markets rallied from the beginning of the year into early February, driven by encouraging data regarding the health of the U.S. economy and improved economic outlooks in China and Europe that were supported by the reopening of the Chinese economy and falling energy prices in Europe. In the U.S., positive economic surprises— including an unexpectedly strong jobs report in January, an uptick in consumer spending, and a slowing trend in inflation— boosted optimism that a U.S. and global recession could be avoided. However, investor sentiment shifted by mid-February amid concerns that these positive developments could lead the Federal Reserve (Fed) to take a more hawkish policy stance. From February 2 through February 21, the 10-year U.S. Treasury yield rose, and futures markets shifted their predictions for both the federal funds rate and the 10-year Treasury yield meaningfully higher (Figure 1).