Whatever business week faces us, be it normal or short like this one on the occasion of Independence Day, our thoughts are focused on the same thing: what will the Federal Reserve System do? Someone thinks that, having seen an inflation peak in the rearview mirror, the FRS will turn around and begin lowering interest rates to prevent the economy from falling into a recession and the financial markets from a catastrophic fall. Others bet on the central bank continuing its fight until it achieves a full and total victory over inflation. Even if the СРІ of 8.6% recorded in May is the highest and inflation decreases in summer and autumn, will it drop to 8% or 7%? And, given such a level of price increase, which is four times higher than the target, is the Fed board able to stop and turn its monetary policy in another direction toward liberalization?
There are many questions, and investors are focusing all their attention on macroeconomic data and statements by the management of the U.S. central bank, which we expect to hear this week.
On Wednesday afternoon, we’ll see the minutes of the last meeting of the Fed, held on June 14–15, where the central bank decided to increase interest rates by 0.75%. Will there be another hike in July and possibly in September? The minutes won’t give an immediate answer to this question, but they will at least demonstrate the opinions of Federal Open Market Committee members on the further mitigation of the price increase and its possible outcome. Last week, Powell said there's "no guarantee" the Fed can avoid a hard landing. And, by the way, it seems that the "hard landing" is becoming more and more real.
GDP is in decline. Last week, the U.S. Bureau of Economic Analysis announced its final data about the 1.6% decrease in GDP in the first quarter. The latest estimation by the Federal Reserve Bank of Atlanta for the second quarter is even worse, showing a 2.1% decline. This means, if the prediction is correct and the GDP decline lasts for two successive quarters, the U.S. economy will actually enter a recession. But even under this scenario, it’s unlikely that anyone will be really alarmed if unemployment stays as low as it is now. However, if we see the labor market cool down, especially if the slowdown is significant, it will be no joke anymore.
The main event of the week will be the Employment Situation Summary, to be published on Friday, as always. Economists interviewed by Bloomberg forecast a 275,000 increase in the number of jobs during the last month, which, although being less than the 390,000 jobs created in May, still shows that labor demand isn’t declining. And this can be "a strong buffer against rising recessionary risks," experts say.
The earnings season starts only next week, but it’s quite possible that in the coming days we will hear more worsened forecasts from many companies and lower recommendations from Wall Street analysts. General Motors, Kohl's, Micron, and some other companies have already warned about lower earnings, while this week, investors anticipate revised outlooks from Southwest Airlines, American Airlines, and Delta Air Lines. I guess they will not be the last ones. Many companies have already announced staff reductions, mostly in the tech and real estate industries. These include Microsoft, Tesla, and Coinbase, with Meta joining on Friday, whose CEO Mark Zuckerberg announced that it had reduced its plans to hire employees by at least 30%. "If I had to bet, I'd say that this might be one of the worst downturns that we've seen in recent history," said Zuckerberg to his staff during a question-and-answer session last week.
So it looks like we are facing difficult times. Miller Tabak Equity Strategist Matt Maley believes that the chance of trading down to 3,200 on the S&P 500 is very attainable. "People keep saying that the recession is getting priced into the stock market," says Maley. "I think it's just barely beginning to be priced in."
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