Wall Street has been hit hard by inflation fears and the potential impact on global economic growth. Traders tried to bargain buy on Friday. They welcomed the Chinese People’s Bank’s new support measures, which saw its prime lending rate drop five years earlier than anticipated.
The market is full of Fed hawks as the central banks of the West seem prepared to do anything to reduce inflation, and markets fear that this could lead to a recession. Although the latest statistics remain relatively solid, some countries with high incomes may struggle to withstand a sharp downturn. Uncertainty remains about the effects rate hikes will have on the economy, housing, and speculative corporate bond markets.
Recession Fears Now Reality For Banks?
Numerous financial institutions including Morgan Stanley, Goldman Sachs, and Credit Suisse have issued new warnings about a recession. The Fed and other financial institutions made it clear this week that they will likely increase the rate of recession to crush demand and control inflation.
In a note to clients, Goldman Sachs stated that the base-case end-of-year S&P500 forecast is 4,300. According to Goldman Sachs, the worst-case scenario, which would see stocks drop 10%, is 4,300 for the S&P500. Jan Hatzius and other Goldman executives have been revising growth forecasts throughout this year.
Hatzius predicts that the US will experience 2.4% growth this year, a decrease of 2.6% in previous years and that 2023 will see a growth of only 1.6%. Hatzius and her colleagues also expect that the unemployment rate may rise slightly, “especially since job openings rates typically fall when there is an unemployment spike in recessions.” Hatzius’ team predicts that unemployment will reach 3.5% by 2022 and 3.7% by 2023.
Morgan Stanley projects that the S&P 500 Composite will finish the 12-month period at a bullish level of 4,450, a bearish 3350, or a base (and expected) level of 3,900. Katy Huberty from Morgan Stanley’s Equities Research for the Americas predicts that the base for the S&P index will be closer to 3,400-3,500 in June next year. This means that she expects a recession to occur during Q2 2023. Morgan Stanley is in agreement with Credit Suisse that volatile markets will continue without “leadership” (referring to the industry moving the market in one direction or another).
Morgan Stanley believes that we may see a recession in 2023 due to a lack of consumer confidence and “sticky input/labor cost inflation” which could lead to negative earnings. Morgan Stanley points out that the recession is not in its base case forecast, but it also divulges that its equity risk premium is too low and stocks are still too expensive in its view. Led by tech stocks that have been overvalued despite recent falls.
Rebound or Dead Cat Bounce Possible?
I am not sure we have seen true support yet in the markets. Financial markets are still in a fog, and nervousness persists. When pessimism has reached its peak, it is often at these times that we see a bearish rally in the market.
However, we could likely see something like that this week or a “dead cat bounce” because prices seem to have been incorporated into future monetary tightening and the reduction in the Fed’s balance sheets. No one seems to be surprised by inflation. This means investors could reach regain confidence and jump into the market causing it to jump up, only to crash soon after. Personally, I am waiting to see more support as I think the effects of inflation are just started to be felt by consumers.
Bond yields have slowed down despite the offensive speeches by central bankers. Ninety-three percent of investors think that the Fed will increase rates by half a percentage at its June 15 meeting and then again at the same rate on July 27. The US 10-year yield is currently at 2.84% (2.92%), the German Bund at 995 (0.92%), and the French OAT (1.47% (1.43%).
Bitcoin is trading at around $30,000 as of this writing and is almost even. This is the seventh consecutive week with historical declines. Crypto investors may feel the pinch for a while, as no fundamental bullish catalysts exist. As seen in the chart, the current trend is BEARish. That being said, I have personally in the $30k and sold around $45K. So there could be trade there.
The steady bullish trend continued for Oil this week. WTI and Brent were at USD 105 and USD 115, respectively, and WTI rose to Brent’s level for a few days. Despite this week’s pause, there are still upside risks due to China’s reopening of its ports and the EU’s ongoing efforts to embargo Russian oil.
Gold recovered slightly and some think is about to make a move up. Looking at the trend, I would agree. We have not seen gold perform as expected with rising inflation. However, gold is sitting at big support levels and the shiny metal is trading below the 200-day moving average. Due to the weakening of China’s industry, we are not seeing the increases in precious metals prices that many projected.