MSCI’s broadest index of Asia-Pacific shares outside Japan skidded 0.7%, while Japan’s Nikkei declined another 5.5% to reach seven-month lows

Share markets slipped and bonds rallied in Asia today as worries the US could be heading for recession sparked mass risk aversion and wagers interest rates will have to drop sharply, and quickly, to support growth.

Investors began where they finished on Friday by knocking Nasdaq futures down 1.87%, while S&P 500 futures slid 1.22%.

MSCI’s broadest index of Asia-Pacific shares outside Japan skidded 0.7%, while Japan’s Nikkei declined another 5.5% to reach seven-month lows.

Japanese 10-year bond yields declined a steep 17 bps to the lowest level since April at 0.785% as markets radically reconsidered the prospect of another hike from the Bank of Japan.

Treasury bonds were in demand with 10-year yields down at 3.755%, the lowest since mid-2023.

Two-year yields dipped 50 bps last week to 3.82% and could soon slip below 10-year yields, turning the curve positive in a way that has heralded recessions in the past.

The worryingly weak July payrolls report saw markets price in a near 70% probability the Fed will not only reduce rates in September, but cut by a full 50 bps. Futures imply 155 bps of cuts this year, with a similar amount in 2025.

We have raised our 12-month recession odds by 10pp to 25%, stated analysts at Goldman Sachs in a note, though they thought the danger was limited by the sheer scope the Fed had to ease policy.

Goldman now expects quarter-point cuts in September, November, and December.

The premise of our forecast is that job growth will recover in August and the FOMC (Federal Open Market Committee) will judge 25bp cuts a sufficient response to any downside risks, they said. If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September.