Source: Hongguan insights, the headline of the original research newspaper, "Recession risk increases, does not reduce Fed tightening determination-- Fed tracking issue 19"
Stock markets in Europe and the United States fell across the board on Tuesday as fears of recession sent the market into a safe-haven mode. The Dow Jones industrial average is down 508 points, or about 1.6%, the s & p 500 is down 1.6%, and the Nasdaq composite index is down about 1.9%.
In the face of rising pressure from a slowing economy, interest rate hikes are expected to continue to decline, while Fed officials are still clinging to hawkish rhetoric. At present, the operational space of the Fed is gradually narrowing, and the process of its game with the market may also be the stage of high volatility in the stock and bond market.
The US PMI fell short of expectations in June and the second-quarter GDP forecast was revised down to a negative range, reigniting the market discussion about the US recession. With regard to the recent asset performance and the Fed's attitude, we believe that:
At present, the market is worried about inflation has declined, and the pressure on the supply chain has slowed.In the United States, the PCE price index in May was 6.3% year-on-year, and the core PCE was 4.7% year-on-year, both of which were lower than expected, with core PCE continuing to decline since it peaked in February. The lower-than-expected PCE price index partly allayed concerns about the persistence of current inflation, and market inflation expectations implied in 10-year Treasuries also fell last week.
From the perspective of the supply chain, the pressure on the domestic and external supply chain in the United States continues to ease: the number of ships waiting at the berths and their periphery of Los Angeles and long Beach ports is 21, and the ship congestion at the external ports continues to ease; from the perspective of the internal supply chain, the June ISM PMI data show that the backlog of orders and supplier delivery time have declined, and the thorniest time of supply chain problems is gradually passing.
Economic data show that the US economy is moving towards recession, with interest rates on 10-year Treasuries under pressure.Last week, the ISM manufacturing PMI index fell to 53, below expectations of 54.5 and the previous reading of 56.1.
At the same time, the Atlanta Fed once again downgraded its forecast model for US second-quarter GDP, with the current second-quarter GDP annualized rate of-2.1%, of which inventory changes and housing investment may be the biggest drag. The lower-than-expected economic sentiment index and the Fed's lower forecast for GDP growth have deepened fears of a recession in the United States. Yields on 10-year Treasuries fell back below 3 per cent last week, and economic concerns have put pressure on yields.
Interest rate hikes are expected to continue to fall, while Fed officials are still clinging to hawkish rhetoric.Market interest rate hikes are expected to continue to decline under fears of an economic slowdown or even recession, with futures implying that the full-year 2022 interest rate hike is expected to fall to 314bp from last week's 320bp. However, Fed officials still maintain a tough hawkish attitude: at the ECB forum last Wednesday, Federal Reserve Chairman Powell said that he would continue to take tough measures to deal with inflation in the future, while previously more dovish San Francisco Fed Chairman Daley also expressed support for raising interest rates in July 75bp.
In the process of walking a tightrope, the Fed is wary of the risk of departments worsening and transmitting into recession.In the face of the rising pressure of economic slowdown, the Fed's room for operation is gradually narrowing. The ideal path for the Fed's follow-up monetary policy is an improvement in supply, a fall in inflation, a loosening of the margin of monetary policy, and a soft landing in the US economy.
However, with the promotion of this path, the fault tolerance rate is actually relatively low. Therefore, the process of the game between the Fed and the market may also be the stage of high volatility in the stock and bond market. In addition to market volatility, there is also a need to be wary of the risk of a recession caused by the Fed's rapid tightening of transmission to all sectors.
Risk hint: the Fed tightens monetary policy more than expected, and monetary tightening leads to a higher-than-expected transmission speed of the economic downturn.
Edit / Corrine