The stock market should continue to be weighed down by fears that policy tightening by the Fed and other central banks will push the US, if not world, into recession. The Fed's intent to fight inflation will be reiterated in this week's Congressional testimony by Fed Chair Powell. So, while the market could consolidate over the rest of June, after the latest plunge, these fears are not likely to go away as yet. But, Powell may discuss the possibility that a recession can be avoided, which could help the market.
Ironically, the market's recession fears are not likely to abate until there is enough evidence -- either of a slowdown or lower inflation -- pointing to an end of Fed rate hikes. Significant evidence is not scheduled to be released until the June Mfg ISM and Employment Report in the first week of July. Both are likely to soften, but probably not by enough to derail the Fed's tightening path. The most important piece of the Employment Report -- Average Hourly Earnings -- is hard to predict.
At his post-FOMC Meeting news conference, Fed Chair Powell emphasized the Fed's intent to bring down inflation, but left open the door for a modest downshifting. He called last week's 75 BP hike extraordinary and expects a 50-75 BP hike at the July 26-27 meeting. A downshifting to a 50 BP hike would likely provide only modest support for stocks, however, since it still would be significant tightening. Moreover, it would not end the tightening cycle. The Fed's expectation is for the funds rate to be raise to over 3% by year end. There would be at least another 1 percentage point of tightening needed to achieve this if the Funds Rate were to be raised by 50 BPs in July.
A 50 BP hike in July is beginning to appear more likely than 75 BPs, as US economic data have started to soften notably. Initial Unemployment Claims are now above the May average, which, itself, is above the April average. Continuing Claims have flattened out. The early evidence is for a further slowdown in Nonfarm Payrolls in the June Employment Report. Among the economy's sectors, housing looks to be turning down. Along these lines, this week's data on May Existing and New Home Sales are expected to post declines. And, manufacturing may be slowing. Some evidence points to a decline in the June Mfg ISM.
The most important development would be if commodity prices fall significantly. But, this has yet to be seen, despite Friday's drop in oil price. Indeed, gasoline prices would jump about 10% m/m (SA) in the June CPI if they stay near the current level for the rest of the month. Powell acknowledged that the Fed has little, if any, control over commodity prices when supply factors, such as the Russia/Ukraine war, are operating. The Fed's aim is to prevent a wage-price spiral. Labor cost data, such as Average Hourly Earnings, and measures of longer-term inflation expectations, such as the University of Michigan 5-Year Inflation Expectations, will be important in this regard. Unfortunately, there is little, if any, evidence to predict them. The Final-June Michigan Survey will be released on Friday.
The market is right in worrying about recession. Besides the drag from higher yields, higher dollar and lower stocks, the surges in food and energy prices represent a tax on the consumer. For example, the more-than-doubling $3.00 increase in the price of a gallon of gas since the depth of the pandemic amounts to a $400 Bn (annualized) reduction in consumer purchasing power. While much of this would be offset if the oil industry used the additional revenue to increase production and drilling, this has been slow to happen because of the anti-carbon stance of the Biden administration. The drag from higher gasoline prices also is offset to the extent that workers' compensation increase. But, this offset would not succeed if higher wage rates are passed through to prices.
No comments:
Post a Comment