Wall Street Trading Week Begins: Tech Giants and Economic Data

•  trendspotteam

•  Apr 23 2023
   
•  86
 

Many prominent economists and major banks are sounding the alarm that the economy is teetering on the edge of a recession, although they may differ in their views on the severity of the downturn. This widespread consensus about the impending arrival of a recession is a rare occurrence.

The US has already experienced an increase in interest rates to 5% as the Federal Reserve has aggressively tackled inflation, which had peaked at 9.1% but has since moderated to 5%. While the trend is positive, it may not be sufficient for the Federal Reserve to consider lowering interest rates, as the job market remains robust and the risk of a resurgence of aggressive inflation persists.

The Federal Reserve is more concerned about the risk of higher inflation than a potential recession. It views inflation as the most significant threat to the economy, capable of causing severe damage and even collapse. As a result, the current market conditions in the United States and globally, influenced by events on Wall Street, are complex and intriguing, as the Federal Reserve navigates the challenges of balancing inflationary pressures with economic stability.

April PMI Snapshot: Industry vs. Services Sectors

The latest purchasing managers' indices (PMIs) for April indicate a widening disparity between the industry and services sectors. The PMIs for the services sector have continued to rise significantly above the threshold level of 50, after five consecutive months of being below 50, indicating a positive trend. However, in contrast, the PMIs for the industry sector suggest a deepening gap and potentially challenging conditions.

The recent "Beige Book" released by the Federal Reserve, the first since the banking crisis, noted that there has been little significant change in economic activity compared to the previous survey. Descriptions of growth in recent surveys have indicated a slowdown, and expectations have not changed significantly. Some regional Federal Reserve branches have reported a reduction in credit conditions in banks, and the expansion of the labor market has slowed.

Companies have also reported a moderation in price increases. However, the Atlanta Fed Wage Growth Tracker, which monitors changes in average wages, has indicated that wage growth remains relatively high and even increased in March. The earnings report season has started on a positive note, with a higher percentage of companies beating forecasts (currently at 77.5%) compared to the average since 2015 (around 75%). It's important to note that the forecasts were relatively low to begin with.

Leading Indicators Signal Economic Slowdown

Despite the positive performance in the first quarter, it is important to note that much of this strength can be attributed to unusual seasonal factors. Furthermore, leading indicators are signaling a clear slowdown in economic activity. Adding to the concerns, there is expected to be an increase in uncertainty due to the traditional debate around the debt ceiling, which this time appears to carry higher risks than ever before, as evident from indicators such as credit default swaps (CDS) and the significant gaps between implied interest rates for the near term compared to those for June and beyond. Market sentiment seems to be preparing for the possibility of a major conflict related to the debt ceiling, which could potentially result in significant fiscal tightening on top of the expected credit tightening due to the ongoing banking crisis.

The stock market is pricing in a high probability, close to 100%, of the Federal Reserve raising interest rates by 0.25% in their decision on May 3, which would bring the rate to 5.25%. However, market expectations shift towards a potential decrease in the Fed interest rate starting in July, with the anticipated level reaching around 4.75% by the end of 2023. This reflects the market's anticipation of potential changes in the monetary policy stance of the Federal Reserve over the coming months.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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