Another Organization Joins in on Cutting Economic Forecasts
Last Updated 4:15PM EST
Stock indices ended Wednesday’s trading session in the red. The Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 declined 0.81%, 1.08%, and 0.76%, respectively.
The real estate sector (XLRE) fell the most today, as it finished down 2.37%. Alternatively, energy was the only sector that finished in the green, although it gave up most of its gains from earlier in the day.
Furthermore, crude oil remained above $122 per barrel, while the U.S. 10-year Treasury yield continues to hover above 3%.
Not long after the World Bank cut its economic outlook on Tuesday, the Organization for Economic Development (OECD) joined in on reducing its outlook for 2022.
The OECD had originally forecasted for global GDP to grow at a rate of 4.5% for this year. However, it now believes that growth will only be 3%. The downgrade is mainly attributed to the war in Ukraine and China’s zero-COVID policy that continues to shut down large cities in the world’s most populated country.
However, the OECD doesn’t believe that stagflation will occur the way that the World Bank does. Indeed, the OECD believes inflation will come down throughout the next 18 months.
This implies that central banks will be able to orchestrate a “soft landing,” where it can bring down inflation without creating a recession. However, investors should note that this has rarely been achieved in the past, highlighting the level of difficulty for such a task.
President Biden is Being Pressured to Combat Inflation
Last Updated 3:15PM EST
Equities are red heading into the close. As of 3:15 p.m. EST, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 are down 0.92%, 1.03%, and 0.75%, respectively.
The materials sector is the laggard so far, as it is down about 2%. Conversely, the energy sector has overtaken the communications sector as the session’s top performer, remaining roughly flat on the day.
Furthermore, crude oil continues its upward momentum as prices hover close to $122.35 per barrel, an increase of more than 2%, while the U.S. 10-year Treasury yield remained elevated above the 3% mark.
Moderate Democrats are pressuring the president to do more to combat inflation, calling for the removal of tariffs imposed by former President Trump. In addition, they are also suggesting the removal of trade barriers that are impacting food supply, as well as the release of even more oil from the strategic reserve.
Although this would likely relieve some pressure on consumers, it may be a difficult political move for President Biden, as labor groups insist that the government remain tough on China.
In addition, supply-chain shortages will not be solved by this move, meaning that inflation will likely continue to remain high, even if at a reduced level.
Concerns of an Economic Slowdown Continue to Increase
Last Updated 12:15PM EST
Stock indices are still mixed halfway into the trading session. As of 12:15 p.m. EST, the Dow Jones Industrial Average and the S&P 500 are down 0.15% and 0.22%, respectively. On the other hand, the Nasdaq 100 is up 0.12%.
The materials sector (XLB) is the laggard so far, as it is down 1.07%. Conversely, the energy sector (XLE) has overtaken the communications sector as the session’s top performer, up 1.28%.
Furthermore, crude oil continues its upward momentum as prices hover close to $122 per barrel, an increase of more than 2%, while the U.S. 10-year Treasury yield pulled back slightly to 3.018%.
Concerns of an economic slowdown continue to mount as major bank Credit Suisse joins the growing list of companies to have issued profit warnings.
The bank blames the slowdown in monetary tightening from central banks and less trading activity from cautious clients. As a result, cost cuts are expected to accelerate, meaning significantly lower bonuses and job losses.
It’s also worth noting that the GDPNow tracker, which is a tool used by the Atlanta Federal Reserve to estimate GDP in real-time, indicates that the growth rate will be 0.9% in the second quarter. For reference, last week’s estimate was 1.3%.
This adds more fuel to the narrative of an economic slowdown while also bringing us closer to the possibility of a recession.
Mortgage Applications Continue to Fall
Last Updated 10:00AM 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 0.29% and 0.15%, respectively. On the other hand, the Nasdaq 100 is up 0.38%.
The consumer staples sector (XLP) is the laggard so far, as it is down 0.85%. Conversely, the communications sector (XLC) is the top-performing sector, up 0.5%. Furthermore, crude oil is in the green, up 0.15%, while the U.S. 10-year Treasury yield increased 4.4 basis points to 3.023%.
This increase in U.S. Treasury yields is likely putting pressure on some stocks today, as higher yields tend to make stocks less attractive. In addition, it also impacts mortgage activity.
On Wednesday, the Mortgage Bankers Association released its weekly report for the U.S. 30-year mortgage rate. After several weeks of decline, the mortgage rate increased to 5.4% from last week’s 5.33%.
As a result, the number of mortgage applications declined week-over-week by 6.5%. This is the fourth-straight week where mortgage applications fell, indicating that homebuyers are not very confident about the real estate market and that fewer people can afford the higher rates.
Pre-Market Update
Stock futures dipped early Wednesday morning as recession fears grew. Futures contracts on the Dow Jones Industrial Average (DJIA) declined 0.34% as of 4:50 a.m., Wednesday. Meanwhile, the S&P 500 (SPX) futures and Nasdaq 100 (NDX) futures both declined 0.31% and 0.21% respectively.
Several Concerns Emerge
On Tuesday, the Atlanta Federal Reserve’s GDPNow tracker revealed that the economy may end the second quarter with only 0.9% annualized growth, as opposed to the expectation of 1.3% growth from a few days ago. Recall, in the first quarter, the economy had retracted 1.5% in the first three months of 2022.
These revelations mean that the second quarter might be heading toward ending as the second consecutive quarter with declining GDP. If that is true, then technically the U.S. economy might have already entered the first stage of recession.
Another concerning update came from the World Bank on Tuesday, as it cut its global growth view for the year. The bank now anticipates global growth to decline to 2.9% growth in 2022 from 5.7% in 2021, as opposed to its January forecast for 4.1% growth.
For the U.S. economy, the World Bank looks at a higher-than-expected slowdown to 2.5% growth in 2022 with sustained inflation of above 2%. Meanwhile, the International Monetary Fund expects a 3.7% growth in the U.S. economy this year.
Tuesday also saw Target reducing its profit guidance as it works to reduce excess inventory, underscoring the company’s concerns about economic growth amid high inflation.
A Breather
However, newly released data revealed that receding domestic demand for foreign goods in the wake of inflated prices is taking a hit on trade this year. The trade deficit in April dropped 19.1% sequentially, as imports declined and exports continued to hit record highs. This is not necessarily bad news, as a moderating trade deficit can support the U.S. economic growth.
Additionally, with their hopes pinned on May’s consumer price index data, which is expected to be slightly cooler than it was in April, investors tried to shut out the noise. The S&P 500 advanced 0.95%, the Dow gained 0.8%, and the tech-heavy Nasdaq 100 climbed 0.89% at market close, Tuesday.
May’s CPI reading is due to be released this Friday, and may give a clearer idea of how aggressive the Fed might go with its monetary policies.
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