House sales have been declining for the third month in a row, while large losses from retail giants such as Target Corp and Walmart Inc. shook their stock prices last week. GDPNow The Atlanta Fed’s second-quarter GDP growth fell to 1.8% on May 25, from 2.4% the week before.
Softer economic growth increases the risk of weaker corporate profits, which theoretically paves the way for softer stock prices. Several Wall Street banks have warned in recent weeks that the probability of a contraction in the United States is growing, along with an increased probability of low interest rates and high inflation called stagflation.
In the near future, however, some investors believe that a slowdown could support the Central Bank’s rationale for reversing an aggressive monetary policy that has disrupted investors and helped drive the S&P 500 index to a maximum of 20%. many call the bear market ..
The index rose by 6.6% this week and reached a seven-week loss, although it has fallen by 13% so far this year. Net weekly inflows to US equities peaked at 10 weeks, according to data from BofA Global Research on Thursday.
“It is very clear that everyone at the Fed is on board for 50 basis points (interest rate hikes) at the next two hikes. But after that it is unclear what they will do and if interest rates slow down significantly, it could wait a bit,” said Anwiti Bahuguna, portfolio manager. and head of multi-asset policy at Columbia Threadneedle Investments, which recently raised its stake in equities.
Concerns about the effects of higher interest rates at a time when inflation could have peaked will probably mean that the central bank will pause its restraint in September, leaving the daily interest rate between 1.75% and 2% if financial conditions worsen, according to BofA. said in a comment.
The central bank’s expectations have fallen, as investors have now priced a 35% probability that central bank funds’ interest rates will be between 2.25% and 2.50% after a meeting in September, down from a 50% probability a week ago, according to CME.
The Central Bank has already raised its policy rate by 75 basis points this year. Minutes from the last Central Bank meeting showed officials struggling on how best to steer the economy towards lower inflation without causing a contraction or pushing up unemployment sharply.
Signs that growth may be slowing down have helped boost Treasury prices, suggesting that investors are increasingly looking for collateral rather than assets that could be at risk in times of high inflation, Anders said. Persson, Head of Investment in International Fixed Income at Nuveen.
Yields on 10-year upside-down government bonds reached a six-week low of 2.706% on Thursday, after rising to as high as 3.14% this month.
“The market is pricing down,” not a recession, “said Persson, who makes the riskier part of the bond market, such as high-yield bonds, more attractive.
US data on Friday also showed that price increases could be slowing. The Private Consumer Price Index (PCE) rose by 0.2%, the smallest increase since November 2020, after rising by 0.9% in March.
Possibly less hawkish Fed is not necessarily a green light for long-term stock buyers. As inflation has been at its highest for decades, concerns have grown about impending stagnation, a phenomenon that weighed heavily on all asset classes in the supply shocks of the 1970s.
Among those warned is hedge fund manager Bill Ackman, a member of the Fed’s Financial Advisory Committee, who on Twitter this week urged the central bank to suppress inflation by raising interest rates sharply.
At the same time, Citi’s international asset allocation team this week downgraded its US equities to “neutral”, saying: “While the US economic downturn is not the basis of Citi’s economics, uncertainty is high.
However, some investors believe that a turning point may be near.
Esty Dwek, chief investment officer at FlowBank, is betting that the central bank will see signs of slowing inflation and economic growth in August, when policymakers hold their annual meeting in Jackson Hole, Wyoming.
“The central bank has suffered a maximum blow,” she said
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