Two topics had dominated the financial sector last week before last Thursday: 1) China’s slowdown and lockdowns slowly affecting the United States, and 2) the expectations that the Federal Reserve would become more aggressive in tackling inflation.
However, last Thursday morning was shocking to almost everyone: The U.S. The annualized GDP (gross domestic product) fell 1.4% in the first quarter of 2022. One reason is that the economy contracted due to weak exports and a wider trade deficit. Biden calls these “technical elements” today. Another is that consumers are spending less and inventory slowdown.
One-quarter of contraction doesn’t make it a recession. However, this -1.4% growth can be adjusted, as preliminary GDP numbers are always. Surprisingly, however, we have heard from the Fed and the Biden Administration non-stop about how strong and healthy the U.S. economic system is.
At the White House Correspondents’ Association Dinner to Biden, Trevor Noah said it best: “Things Are Really Looking Up. Gas Is Up. Rent Is Up. Food Is Up. Everything.” Not exactly what the Democrats want to be up coming into an election, but it is actually worse.
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For Q1, GDP expectations were +1%, and economists are foolish because they missed 2.4% of their downside expectations. The Q2 GDP numbers should rebound, but they might look weaker than expected given the continued downgrades of the year and further trouble ahead.
Here are some investment bank outlooks that you can take a quick look at:
- Deutsche Bank first says that inflation must be addressed with the most aggressive fiscal and monetary policy since 1980. Is this a Volcker Redux, with interest rates close to 20%
- Bridgewater’sBridgewater’s Rebecca Patterson stated this week that to reduce inflation; interest rates must rise above the Fed’sFed’s neutral rate (2-4%).
- Credit Suisse predicts that inflation will be higher and growth will be weaker. That is a recipe for stagflation. Credit Suisse analysts believe that we will have a hard landing in 2023’s2023’s second half — but not a “hard landing.”
- Analysts at Barclays don’t see the Fed moving beyond neutral. This means that higher inflation is here for the long term.
- Lastly, ING predicts that the dollar will continue to rise in 2022. This could lead to a bust for the dollar in 2023. The dollar has strengthened against other currencies in the last year, while it has declined against domestic goods and real assets.
Credit Suisse’sSuisse’s research found that Google-based clients are now more concerned about stagflation than they were in 2008. This suggests that global communities are increasingly worried about falling growth and rising inflation.
According to market analysts, the Federal Funds Rate will rise to 3.5-4% in Q4, and the yield curve will invert in the second half of 2023. This will result in a “soft landing” in the second half of 2023. The most significant risk of stagflation, according to the group, is “if wage growth doesn’t respond to rising unemployment.” Credit Suisse says that there is no chance for a repeat of the 1970s.
Jay Powell stated that controlling inflation was “necessary” and that an aggressive rate hike of 50bps is “on the table.” He also said that his goal is to bring supply and demand closer together, which would mean crushing demand because he cannot increase supply. He reiterated a note from last Wednesday – I mention it because it is worrying – that we won’t have the same economy as before COVID and that he is ”unsure” of the new economy”. This could indicate an implicit threat of persistent inflation that the Fed cannot bring down.
This year, we won’t be in recession if there isn’t a Black Swan. I believe the Fed will continue to hike rates. However, the Fed is eager to move the needle; they will likely “break something” along the way.
With the Fed’s determination quickly to raise rates, the yield on US debt rose. At the week’s end, the 10-year maturity was at 3.92%, and the yield curve was inverted. We fully expect bond yields to continue to increase this year unless the Fed changes it plan.
Cryptocurrencies have been hurt by the decline of the market with Bitcoin unable to recover above $40k. The gloomy macroeconomic environment is dragging crypto sphere players along, with little to no inherently positive catalysts for reviving the crypto-asset markets. There is a strong possibility that they could jump up on some positive news and may have found some support.
Oil appears to be in a ranging trend around $100 dipping below $97 but jumping to $106. When demand is not meeting supply (like now), oil production, specifically Russian oil, is being watched closely. It is likely to continue to trend UP, but may consolidate around the $103 range. Summer is likely to increase
Precious metals continue to suffer despite rising inflation. Specifically Gold has underperformed and it is now at risk of breaking its bullish trend. Historically, Gold was the winner of all asset classes in the 1970s rising inflation by going up over 2000%. Other metals have followed in trend with Silver being down -by 2%, Palladium -1.73, and Copper -2.5%.
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