Plunging bond yields, plummeting oil and stock prices, and a sharp rise in volatility all indicate that investors fear a recession is on the horizon.
Shares fell Wednesday as concerns over Credit Suisse fueled market unease. Silicon Valley Bank and signature bank.
“What we are really seeing is a significant tightening in financial conditions,” said Jim Callon, head of macro strategy for global fixed income at Morgan Stanley Investment Management. “It increases the risk, of course,” he said. “Equities are down. Bond yields are down. Another question is, they seem to be pricing in three rate hikes, will they happen? We can’t rule that out.”
Bond yields rebounded from lows as shares recovered some in afternoon trading after reports Swiss officials were discussing options for stabilization. Credit Suisse.
Wall Street has been debating whether the economy is headed for a recession for months, with many economists expecting a recession later this year.
However, some strategists expect the economic contraction to come sooner due to rapid market movements after the collapse of a US regional bank. Economists are also phasing down growth forecasts on the assumption that bank lending will slow.
Economists at JPMorgan said Wednesday that “we have a very rough estimate that a slowdown in lending growth at mid-sized banks could reduce the level of GDP by 0.5% to 1% over the next one to two years. There is,” he pointed out. “We believe this is broadly in line with our view that tighter monetary policy will push the U.S. into recession later this year.”
Bank stocks helped lead the stock market decline again after Tuesday’s one-day plunge. First Republic, For example, down 21%, pak west It fell nearly 13%. But energy was the worst performing sector, down 5.4% as oil prices fell more than 5%. West Texas Intermediate futures settled at $67.61 per barrel, the lowest level since December 2021.
At the same time, the Cboe Volatility Index is VIX, It surged to a high of 29.91 on Wednesday before closing at 26.10, up 10%.
The S&P 500 fell 0.7% to close at 3,891 after falling to a low of 3,838.
“A bear market bottom is usually retested to make sure the bottom is really in,” said CFRA chief market strategist Sam Stovall. “The risk of a recession is increasing,” he said. “As a result, the open question is whether the October 12 lows will hold up. If not, the S&P 500 at 3,200 is another target based on historical precedent and technical considerations. I think it is very likely.”
Government bonds, a normally more stable market, also traded dramatically.of 2 year government bond yield After trading at 3.93% in afternoon trading, it plummeted to 3.72%, a significant drop from Tuesday’s close of 4.22%. This two-year period best reflects investors’ view of the Fed’s policy direction.
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“I think people are naturally nervous. I think when you look at the whole thing together, there are some elements of rallying. [Treasury] A market that is a flight to quality. There is also an element of tightening credit,” Caron said. Even big banks will tighten their lending standards even more.”
The Federal Reserve has tried to slow the economy and a strong labor market to fight inflation. The consumer price index he rose 6% in February, but is still high.
But a series of bank news has fueled investor fears that a credit crunch could hurt the economy, and further Fed rate hikes will only accelerate that.
So while Fed Fund futures also traded wildly on Wednesday, the market was still pricing in a roughly 50% chance of a quarter-point rate hike from the Fed next Wednesday. It also priced in multiple rate cuts this year.
“Long-term, I think the market is doing the right thing with the Fed pricing, but I’m not sure if they’re going to cut it by 100 basis points,” NatWest Markets. Briggs said he doesn’t expect a rate hike next week. A basis point is equal to 0.01 percentage point.
“Credit is the oil of the machine, and even if the immediate shock were to abate, even if we weren’t concerned about the broader financial sector, risk aversion would set in and the economy would lose credit,” he said. Stated.
Briggs said the reaction from slowing bank lending could be a deflationary or at least a disinflationary shock. “Most small businesses are deposited with local banks in the area. Then, even if your bank is okay, is it more or less likely to offer credit to that new dry his cleaner?” he said. Said. “You will be less likely.”
A CFRA strategist said the Fed’s next move was unclear. “The recent declines in the CPI and CPI, as well as the contraction in retail sales last month, have increased confidence that the Fed will ease its tight tightening stance. “There’s only a week left of the March 22 FOMC statement and press conference, but it’s probably going to feel like an eternity. Tomorrow’s ECB statement and Europe’s response to a new banking crisis.” Waiting also increases uncertainty and instability.”
The European Central Bank was expected to meet on Thursday and raise its benchmark interest rate by 0.5%, but strategists believe that is unlikely.
JP Morgan economists expect the Federal Reserve to raise rates by another quarter of a percentage point next Wednesday and in May.
“We expect a quarter of a percentage point rate hike. A pause now would send the wrong signal that the Fed’s resolution to inflation is serious,” JPMorgan economists said. “Relatedly, it could also send a false signal about ‘financial dominance’, suggesting that central banks are reluctant to tighten or are in a hurry to ease due to concerns about financial stability. The idea is that there is
However, Moody’s Analytics chief economist Mark Zandy said he expects the Fed to postpone a rate hike next week, which could signal the Fed’s rate hike cycle is over for now.
He doesn’t expect a recession and believes a soft landing could continue.
“I don’t think the impact of these rate cuts should be underestimated. Mortgages should go down, which should boost the housing market,” he said. Zandi said he doesn’t think the Fed will turn around and cut rates because the fight against inflation isn’t over.
“I’m a bit confused that the market is saying there’s a 50/50 chance of a rate hike next week and then withdraw it after that. We’ll have to see how this plays out in the next few days. ” He said.
Zandi expects first-quarter growth of 1% to 2%. “But the next few quarters could be zero to 1%, or even negative quarters, depending on the timing.
Goldman Sachs economists on Wednesday cut their economic growth forecast for 2023 by 0.3 percentage points to 1.2%. They also pointed to declining lending from small and medium banks and turmoil in the broader financial system.