Recessionary fears are sending investors into a panic…
With surging inflation, rising interest rates, and a troubled real estate market, Wall Street is hyper-focused on government bond yields and their recent fall in value.
Currently, the 10-year government bond rate is 3.13% compared with its yield of 3.5% two weeks prior.
For money managers, this suggests investors are growing increasingly worried about the U.S. economy.
And this was only further exacerbated by U.S. Federal Reserve Chairman Jerome Powell’s comments in the wake of the central bank’s policy announcement.
During the meeting, the Fed announced it may pursue another 0.75% interest-rate increase in July to ease inflationary pressures.
While this could help the central bank reach its federal-funds goal of 2.25% to 2.5%, it also suggests inflation isn’t cooling as the Fed had hoped.
But it’s not all bad news…
If the central bank does ramp up interest-rate hikes, it may enable it to more rapidly reduce its pace of increases – as it would put interest rates at around 3.4% in 2022.
Yet there is also the possibility that activity is already beginning to slow, allowing for the Fed to ease off on damage control.
The National Association of Realtors reported that May’s existing-home sales declined 3.4% from April to an annual rate of 5.41 million – putting sales closer to pre-pandemic levels.
This data, declining revenue across the retail market, and weaker index performances suggest to Wall Street that the economy is beginning to cool despite rising prices.
Of course, how long it takes for this to unfold remains to be seen. Goldman Sachs recently noted that the ongoing market sell-off, inflation, and interest rates are driving a cyclical bear market, which could last for at least two years.
This would mean that present conditions, volatility, and uncertainty may remain in place until 2023, at the earliest. But once these problems begin to ease, it could fuel a moderation in interest-rate expectations and a potential market bottom.
Whitney Tilson – Empire Financial Research
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