A fleeting rally in March, the global market selloff accelerates once more. Nowhere is safe. The US benchmark S&P 500 is underwater by 15% since the short-lived rally peaked in late March. Australian shares sank 7% in the last two weeks with falling iron ore prices taking away a major cushion for the local market. For the first time in decades, global bonds are spiraling down with equities.

Kerry Craig, global market strategist at JP Morgan, ascribes the uncertainty to three interlinked queries:

Is a recession brewing?

Is inflation really slowing meaningfully?

How eagerly will central banks await answers to either question?

“The inflation outlook and what’s happening in China and with supply chains, fears of a recession have risen and linked to that is the inflation outlook,” Craig says. “In a final piece to this puzzle, there is what central banks eventually do about all that.”

“Some mix of those forces is driving the market on any given day right now as traders seek clarity about which side will prevail.”

The pessimists argue that global economic growth is already slowing and will soon be crushed as central banks raise interest rates in a belated stampede to rein in inflation.

But optimists like Craig think growth will be hard to snuff out as households sit on cash and unemployment hits a record low. As inflation subsides of its own accord, central banks ought to be able to tap the interest-rate brakes rather than slam them, so the theory goes.

Below we take a look at what’s troubling markets today and what investors should be on the lookout for before putting their cash to work.

Recession blues

Markets already wringing their hands over inflation are tacking decelerating growth onto their list of worries.

US corporate profit margins might’ve already hit their peak, according to a report from forecaster Oxford Economics on Thursday. Global manufacturing activity is expansionary but slowing down. The yield curve, a closely watched indicator for clues about future growth, is signalling slower growth.

Bears say we are late in the economic cycle. In other words, that the world economy is close to a recession, and rising interest rates may be the push that sends it over.

Craig, however, has spotted some encouraging trends among consumers, who account for about two-thirds of growth in developed economies. Today’s low-unemployment record and strong spending are “pillars of the economy,” he says.

The unemployment rate in Australia is expected to reach a 50-year low later this year. Data on Tuesday showed retail trading volume continued to rise, reaching a record high in the March quarter.

Where could it go wrong? Investors are looking for any “cracks in the consumer story,” says Craig. Diminishing big-ticket purchases is a classic “flashing light” of a slowdown.

One such warning light began flashing this week. A measure of consumer intentions to purchase big ticket household goods slipped to the lowest since the pandemic first erupted, Westpac-Melbourne Institute data showed.

Where is inflation going?

With inflation hitting records across the globe, investors are unsure just how quickly price pressures will fade.

On Wednesday, optimists took a blow as the rate of US inflation slows less than expected in April. The 8.3% yearly gain is lower than March’s 8.5% reading but above the 8.1% increase economists were expecting. There are also ominous signs in the rise in the price of services after months in which inflation had been dominated by supply-constrained goods, commentators said.

Local traders will be staring nervously, though, as many insist that what has happened in the US will also apply to Australian inflation.

Chief economist Preston Caldwell, who said the numbers fell short of expectations, called it “a sign things may be improving.”

He drew attention to the US 5-Year breakeven inflation rate, which is a measure of the average inflation rate at which traders expect the inflation rate will remain in the next five-year period. It fell steadily through May and hit 2.89 percent on Thursday.

Signs of a peak in the services sector are also seen by AMP Capital chief economist Shane Oliver. The AMP Pipeline Inflation Indicator, which monitors commodity prices, shipping costs and producer prices, is flatlining as freight costs have fallen and energy prices have eased. “This could allow central banks to ease the pace of tightening later this year soon enough to avert recession,” he adds.

Others are less sanguine. Hundreds of cargo ships are lying anchored off the major ports of China, as the country grapples with the consequences of its zero covid policy, further snarling supply chains. Disruptions caused by Russia’s invasion of Ukraine are also extending beyond energy markets.

Hawks or doves?

It will take months for a clearer picture of growth and inflation to emerge. For now, central banks are active and markets are jittery guessing how they’ll respond as new data trickles in throughout this year.

Having taken a “wait and see” approach for much of 2021, central banks are making up for lost time. US Federal Reserve Chairman Jerome Powell said on Thursday curbing inflation would bring “some pain.” Reserve Bank Governor Philip Lowe all but promised multiple hikes earlier this month.

Bears read the renewed exuberance as proof that central banks will trade inflation for economic growth, pushing the economy into recession. In this account, central banks are repeating the gung-ho inflation-busting frenzy of the 1970s and 80s.

Just ask Warnes, who thinks the bears are in charge, and the markets haven’t made nearly enough of a downward move.

“I don’t like being bearish, I’m just being realistic,” he says. “You can’t paint a picture for optimism if every colour in palette is dark. He adds that US markets dropping another 10% to 15% “wouldn’t surprise me at all.”

But there are plenty of optimists, especially when it comes to the ASX. Paul Xiradis, founder and chief investment officer of Ausbil Investment Management, believes Australian corporates will continue to deliver punchy profit growth into next year.

And an overly aggressive approach to rate hikes, as advocated by macroeconomist Simona Mocuta of State Street Global Advisors, would likely be walked back.

“We can’t escape the nervousness surrounding what could be very aggressive pricing in rates from the market,” she writes in a note. As demand and inflation ease later in the year, it may open a window for central banks to slow their rate hikes.

Is there worse to come?

“Recent selling pressures have created a lot of value,” Craig says. If fears of recession turn out to be overblown and central banks take a pause for breath, equities will remain an attractive asset class, supported by solid corporate earnings.

What signals should investors be attuned to for signs of a shift in the winds? “As the French say, ‘no one rings a bell,’” warns Warnes, although resolution to any of the crises battering markets would be welcome.

“There are so many issues hitting markets now. When there’s only one it gives you more certainty,” he said.

“You can’t be putting money in the market without some confidence. It’s not Dusty Springfield territory. It’s not wishing and hoping.”