The financial markets have enjoyed a strong recovery this year, despite growth rates in the global economy — and particularly the advanced economies — continuing to head downwards. With activity nowcasts (the prediction of the present, the very near future and the very recent past) continuing to plummet, and manufacturing sectors weaker than at any time since 2012, markets may have become too complacent about recession risks.
In the final quarter of last year, market behaviour was consistent with two economic shocks operating in tandem. The collapse in global equities and a drop in break-even inflation expectations in the bond market pointed to a negative demand blow to the world economy.
A simultaneous rise in real bond yields and a rising dollar were characteristic of a hawkish stance in monetary policy, notably from the US Federal Reserve. These two shocks were probably almost equally important in explaining the meltdown in risk assets last year.