Ukraine War continues… For the moment, Russian troops are concentrated around the Donbas. Last week it looked like there was a possibility of peace, now we don’t see it happening.
We are seeing signs that the U.S. market is experiencing an economic slowdown. Freight Waves CEO Craig Fuller said a “freight recession” is imminent. Other industries have confirmed that the U.S. economy and global economies are slowing. Gary Friedman, Restoration Hardware CEO, stated, “I don’t think anyone really understands what’s coming from an inflation point of view… and I don’t think anybody really knows how high prices will go everywhere.”
Friedman believes that there will be slowdowns in all sectors. Taiwan Semiconductor Manufacturing Co. Chairman Mark Liu said he also sees a slowdown in sales, particularly in China, which is the largest consumer market.
Inflation might be the leading cause of the U.S. slowdown, but the high cost of inventories may also be a factor. Both manufacturing and non-manufacturing have seen a decline in ISM surveys, which would indicate an economic downturn.
Even though US inflation is at its highest in 40 years which suggests imminent monetary tightening from the Fed, the ECB seems to reassure markets at the end of the week. It doesn’t seem to be in a rush to raise rates. Over the past sessions, major indexes have moved in scattered ways. As the situation in Ukraine continues to be tense, caution is advised. The earnings season will also be closely monitored.
In March, consumer spending increased 0.5% a month-over-month, compared with a 0.3% increase in February. Although consumer spending may have increased, inflation-adjusted numbers likely show that retail spending has been slowing. Consumers are worried about a recession, and inflation is on the rise. We’ll likely see a decrease in consumer spending, which could lead to a recession. Due to low consumer demand and high inventories, there should be good sales and discounts for this year.
These trends will be confirmed with a full schedule over the next few weeks. Many traders are turning to assets that are less sensitive to inflation, or that can benefit from this confusing environment. Companies that have the ability to price effectively and maintain margins under a possible stagflation scenario (an increasingly central scenario) will do well.
Bonds, Rates & Recession?
The primary driver of the economy and markets is the central banks. On one hand, everyone knows the Fed needs to increase rates, while on the other, the Fed’s rate hikes are still making the stock market a little worried.
This week, they found some relief with a slightly lower US inflation release. As US inflation continues to rise, it’s all relative. The increase in prices that exclude food and energy was somewhat less than anticipated between February and March, which helped to calm the bond yields during the middle of this week.
The easing didn’t last for long. On Thursday, the US 10-year rose to 2.8%. In the weeks ahead, central banks will be responsible for ensuring a smooth landing and preventing inflation from slipping.
This week, James Bullard, President of St. Louis Federal Reserve Bank, stated that it is “fantasy” to believe the Fed can combat inflation with interest rate increases. He thinks the Fed must do more to drive down consumer demand. “This [inflation] Report just underscores how urgent the Fed needs to get moving… If households and markets get the impression that the Fed is not going to do right and keep inflation under control, then they have to be able to trust you by doing things that demonstrate that you are serious.”
Bullard’s bottom line is that he is advocating for people being laid off. This is the same as Bill Dudley, former New York Fed President. He said last week that the Fed must deflate stock markets to disrupt consumer psychology. It seems to me that the Fed admits that inflation is a bigger problem than it is being acknowledged. This also shows how destructive the Fed could become.