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class="hfeed site" id="page"> Home Facebook-f Twitter Youtube Search Close The following posts are written by contributors and do not necessarily represent the views of ZitoBox. $4.5m Of These Rewards Have Already Been Paid $4.5m Already Paid Start With $10 Free - Coupon Code: TV PLAY NOW PLAY NOW PLAY NOW PLAY NOW The following posts are written by contributors and do not necessarily represent the views of ZitoBox. June 27, 2022 Investors celebrate growing signs the US economy is faltering Perversely, the vicious sell-off in the US share market appears to have laid some of the foundations for the latest rebound.
Faced with a steep decline in their company’s share price, corporate bosses tend to step up their efforts to cut spending and pare back hiring plans. In turn, this corporate belt-tightening slows the economy and reduces the need for aggressive rate hikes. fantasy springs casino
Indeed, an increasing number of analysts believe the US central bank will be forced to cancel its program of US interest rate hikes well ahead of schedule.
(According to projections released last week, most Fed officials expect to raise the US central bank’s key interest rate to a range of between 3.25 per cent and 3.5 per cent by December. This would be more than 1 percentage point above the highest level US interest rates have reached since the 2008 financial crisis.)
Growing hope that the latest tightening cycle will be brief, and relatively painless, fuelled a major rally in US shares last week.
After three gruelling weeks of declines, the broad US share market index, the S&P 500, finished the week up 6.4 per cent. This leaves it down around 18 per cent from its record close in January.
Perversely, this outbreak of jubilation in equity markets has been sparked by indications that US consumers – whose spending accounts for around 70 per cent of the economy – have become extremely glum as they battle rising prices and falling real wages.
Highlighting this despondent mood, the University of Michigan’s index of consumer sentiment tumbled to a record low of 50 in June.
The Michigan survey found nearly half of those surveyed blamed rising inflation for “eroding their living standards”. US consumer price inflation jumped 8.6 per cent in May from a year earlier, and consumers responded by reining in their spending.
But in their downbeat mood, US consumers have reduced their outlook for inflation over the next five to ten years. They now expect long-run inflation to come in at a relatively modest 3.1 per cent.
This is important because Fed chair Powell noted that climbing inflation expectations was one of the factors that motivated the US central bank to hike rates by a larger-than-expected 75 basis points earlier this month.
The souring mood among consumers appears to have spilled over into economic activity. The US composite purchasing managers index, which tracks activity across both the manufacturing and services sectors, fell to a five-month low in June.
And the growing risks to the outlook for US economic growth were further underscored by the preliminary findings of International Monetary Fund staff regarding the US economic outlook.
“We expect the US economy will slow in 2022-23 but narrowly avoid a recession”, the IMF’s concluding statement says. “Reducing inflation and providing price stability will protect real incomes and help sustain growth over the medium term.”
But the IMF report warns of “material risks that the current headwinds prove more persistent than expected, or the economy gets hit by another negative shock, which would turn the slowdown into a short-lived recession.”
Recession fears are also eclipsing anxiety over high inflation in commodity and credit markets.
The copper price, which is extremely sensitive to changes in the global economic outlook, has dropped by almost one quarter from its March high.
And the slowdown in the US housing market has caused US lumber prices to tumble more than 50 per cent since March.
Meanwhile, the yield on benchmark US 10-year bonds, which jumped to 3.48 per cent a fortnight ago, finished last week at 3.14 per cent. (Yields fall as bond prices rise.)
Fed chairman Jerome Powell said last week achieving a soft landing would be “very challenging”. Bloomberg
Investors appear to be adding more bonds to their portfolios in the expectation that, confronted with slowing growth and waning inflation, the Fed will be forced to water down its plans for tighter monetary policy.
Of course, this also reduces the likelihood US financial markets will experience a major meltdown as the US central banks hikes interest rates, and starts shrinking its nearly $US9 trillion bond portfolio.
“It is possible that markets may not prove sufficiently resilient to smoothly absorb higher interest rates and the shrinkage of the Fed’s balance sheet,” the IMF report cautioned.
“The known shortcomings in the ‘plumbing’ of key Treasury and money markets and the run risks in certain asset management vehicles have the potential to create systemic problems in market functioning.”
If the US bond market were to seize up, or if a sharp market decline caused investors to rush to withdraw their money from hedge funds or exchange-traded funds, the US central bank would find itself in a difficult situation.
As the IMF report notes, this would present the Fed “with a dilemma in deciding whether or not to inject liquidity to preserve market functioning at the same time as interest rates are moving higher to contain inflation”.
But while optimists like to believe Fed-induced tightening pain will soon be over, others believe the market is simply enjoying a reprieve before continuing to push lower.
Some analysts argue last week’s rally simply reflected the need for major institutional investors to rebalance their portfolios before the end of the month.
This month’s vicious drop in share prices – which suffered heftier declines than bond prices – means institutional investors have to top up their equity holdings to ensure they comply with mandates. Because market liquidity is low, this portfolio rebalancing triggered a strong rally in equity prices. this website
Other analysts say it is far too premature to call an end to the share market pain.
They argue market sentiment is a long way from the extreme investor pessimism – and the acceleration of selling pressure – that typically characterise major market lows.
Instead, they believe we’re witnessing an ordinary bear market rally.
Which is certainly no reason to crack open the champagne.
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