Stocks, Commodities, and Bond Yields Fall as Recession Fears Rise
Last Updated 4:15 PM EST
Stocks finished Wednesday’s trading session in the red, as the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 declined 0.15%, 0.13%, and 0.16%, respectively. The energy sector was the worst performer, as it fell 4.02%, while real estate was the session leader with a gain of 1.6%.
Despite the supply chain shortages, commodities tumbled on growing fears that a recession will negatively impact demand. Indeed, WTI crude oil is down almost 4% to the $105 range after bouncing off its intraday low of $101.56 per barrel, as the downward momentum that started last week continues.
Other commodities such as steel and copper have also been trending down recently. This could be caused by a potential slowdown in construction projects, which can be hinted at by the decline in U.S. housing starts witnessed in May.
In addition, the recession fears appear to be causing a rally in bonds, as the U.S. 10-Year Treasury yield declined 12.3 basis points to 3.158%. Similarly, the U.S. Two-Year yield fell 14.3 basis points to 3.058%, widening the spread between the two yields to 10 basis points. Nevertheless, the spread is still very narrow and close to inverting.
Stocks Rise after Jerome Powell Testifies
Last Updated 3:00 PM EST
Stocks are green heading into the final hour of the trading session. As of 3:00 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are up 0.4%, 0.6%, and 0.8%, respectively.
The energy sector is the worst performer, as it is down 3.4%, while real estate continues to lead the sectors with a 2.6% gain.
This comes after Federal Reserve Chairman Jerome Powell testified to congress. Jerome Powell said that a recession is indeed possible as interest rates rise to combat inflation. The Federal Reserve believes that it is absolutely essential to curtail inflation and may have to raise rates above neutral, which is when the Fed’s policy restricts growth.
Nevertheless, investors appear to be viewing Powell’s comments as less hawkish than expected, which is a little surprising considering that he hasn’t said anything different than before.
However, the underlying theme from congress’ set of questions was that the majority of inflation is being caused by factors that are beyond the Fed’s control. As a result, investors may be interpreting this as a potential reason for the Federal Reserve to not have to raise rates high enough to cause a recession.
Mortgage Rates Hit Highest Level Since 2008
Last Updated 12:00 PM EST
Stocks are green halfway into the trading session. As of 12:00 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are up 0.1%, 0.1%, and 0.4%, respectively.
The energy sector is still the laggard so far, as it is down 3.4%, while the best performing sector, real estate (XLRE), is up 1.8%.
WTI crude oil is down over 3% to $106, as its downward momentum continues, while the U.S. 10-Year Treasury yield is hovering around 3.16%, pulling back 12.1 basis points from yesterday’s close. The spread between the 10-Year and Two-Year U.S. Treasury yields remains narrow, as it currently sits at 8.1 basis points.
On Wednesday, the Mortgage Bankers Association released its weekly report for the U.S. 30-Year mortgage rate. The mortgage rate increased to 5.98% from last week’s 5.65%, the highest it has been since November 2008.
Despite the higher rates, the number of mortgage applications increased week-over-week by 4.2%. This follows last week’s increase of 6.6%, indicating that homebuyers may be trying to lock in the current rates before the Federal Reserve pushes them higher with more aggressive rate hikes.
Nevertheless, mortgage application volume is down substantially on a year-over-year basis, with the Mortgage Market Index at 320.4 compared to 686.4 in June 2021.
Stock Indices are Mixed to Start the Day; Canada Reports Hot Inflation
Last Updated 10:00 AM EST
Stock Indices are mixed after the first 30 minutes of trading. As of 10:00 a.m. EST, the Dow Jones Industrial Average and the S&P 500 are down 0.6% and 0.3%, respectively. Meanwhile, the Nasdaq 100 is up 0.2%
On Wednesday, Statistics Canada released its inflation data for the month of May. Core CPI came in at 0.8% month-over-month and 6.1% year-over-year, compared to expectations of 0.4% and 5.9%, respectively. Furthermore, the CPI figure was 1.4% month-over-month and 7.7% year-over-year, versus the forecast of 1% and 7.4%, respectively.
Similar to what has been occurring in the U.S. and in Europe, Canada’s inflation doesn’t appear to be peaking. Instead, it seems to be accelerating. Therefore, it’s likely that the Bank of Canada will follow in the Federal Reserve’s footsteps and hike interest rates by 75 basis points.
As a result, Canada’s economy will slow down, going forward. This would add further downward pressure to the American economy since Canada is its largest trading partner.
Stock futures dipped in early morning trading on Wednesday amid soaring inflation and the Fed’s aggressive monetary policy to tame it, threatening to constrict economic growth in the process.
Futures on the Dow Jones Industrial Average (DJIA) receded 1.49%, while those on the S&P 500 (SPX) dipped 1.74%, as of 5:04 a.m. EST, Wednesday. Meanwhile, the Nasdaq 100 (NDX) futures retracted by 1.96%.
The downward movement came after the market experienced a fresh bout of optimism in regular trading hours on Tuesday after weeks of selling. The Dow ended 2.15% higher on Tuesday, while the S&P 500 and the Nasdaq 100 closed 2.45% and 2.49% higher. However, it is not yet clear whether this optimism is just a brief loosening of the bear’s grip, or the start of a sustainable rally.
Recently, fears that the economy is slipping into a recession have been rife, especially after May’s inflation reached its highest in 40 years, prompting the Fed to take its hawkishness up a notch with a 75 basis point interest rate lift. This has affected investor sentiment and weighed on stocks.
Meanwhile, U.S. home prices continued to climb in May. The median value crossed $400,000 the first time ever, even as house sales dropped due to higher mortgage costs.
What Experts are Saying
Financial Services firm UBS gave some hope, saying that even if the economy tips into a recession, it is more likely to be a “shallow one given the strength of consumer and bank balance sheets.”
However, Goldman Sachs seems to be more skeptical in this regard, saying that the possibility of a recession has gone significantly up. The firm believes that even though economic activity is showing signs of slowing down, the Fed is likely to keep tightening its monetary policy in case energy prices rise further.
The chances of energy prices upholding the upward momentum are also high at least as long as the Russia-Ukraine war continues and nations do not come to a trade settlement. Therefore, Goldman Sachs’ estimate regarding the Fed’s actions is a major source of worry.
Meanwhile, Oppenheimer expects markets to remain volatile “until the actions taken by the Federal Reserve thus far…and the actions it takes going forward have had time to work through the system.”
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