Federal Reserve Chairman Jerome Powell repeated this week that the Fed would continue to raise the fed funds rate and slowly implement QT even if a recession resulted.
The bond market heard this message loud and clear. Stocks continued to decline as before, but longer-maturity Treasury yields gapped down even though the Fed is expected to raise the overnight fed funds rate. The 10YT gapped down to 2.9% during the week even though the Fed’s dot plot shows that the FOMC will target a fed funds rate of 3.5% by the end of the year. That would lead to an inverted yield curve.
The entire Treasury yield curve dropped last week. (Treasury yields are falling, which is normal at the start of a recession. The 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity is essentially zero.
The Fear & Greed Index is in Extreme Fear (but not deeply). The trade is risk-off as stocks and junk bonds are dropping while the Treasury prices are rising.
Economically sensitive commodities are dropping. Copper, oil, natgas are falling. Copper is falling harder than gold (a “mungofitch ratio” that reflects the real economy). USD is strong and rising.
Real GDP dropped 1.6% in 1Q22, largely due to inventory. The Atlanta Fed’s GDP Now estimate has fallen off a cliff in the past week, showing -2% forecast for 2Q22. Real Personal Consumption Expenditures declined in May.
The Institute for Supply Management’s June Manufacturing PMI® registered 53 percent, down 3.1 percentage points from the reading of 56.1 percent in May. This is the lowest Manufacturing PMI® reading since June 2020. The New Orders Index reading of 49.2 percent is 5.9 percentage points lower than the 55.1 percent recorded in May. All of the six biggest manufacturing industries — Computer & Electronic Products; Machinery; Transportation Equipment; Petroleum & Coal Products; Food, Beverage & Tobacco Products; and Chemical Products — registered moderate-to-strong growth in June.
In May, the Services PMI® registered 55.9 percent, 1.2 percentage points lower than April’s reading of 57.1 percent. This is the lowest reading since February 2021.
The Service sector of the economy is much larger than the Manufacturing sector. It is concerning that both are slowing although growth is still positive.
I think that the bond market, which always tries to predict future rates, is expecting a recession soon…or possibly that it has already started.
The stock market has dropped due to the anticipated impact of higher interest rates on companies, especially “high-growth” companies with high debt levels that need to be rolled over. But I don’t think that a recession is fully priced in to the stock market yet.
The METAR for next week is rainy but not stormy. The market is moving into winter but there isn’t a crisis on the horizon.
Wendy
https://stockcharts.com/freecharts/candleglance.html?VTI,$SP…
https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…
https://stockcharts.com/freecharts/candleglance.html?$SPX,$U…
https://www.cnn.com/markets/fear-and-greed
https://stockcharts.com/freecharts/yieldcurve.php
https://fred.stlouisfed.org/series/T10Y2Y
https://fred.stlouisfed.org/series/DTWEXBGS
https://fred.stlouisfed.org/series/GDPC1
https://www.atlantafed.org/cqer/research/gdpnow
https://fred.stlouisfed.org/series/PCEC96
https://www.ismworld.org/supply-management-news-and-reports/…
https://www.ismworld.org/supply-management-news-and-reports/…