Global market recession ‘a possibility’ – US Federal Reserve
Global markets were lifted in the final week of June 22, as China eased its quarantine restrictions.
This forms part of a bearish outlook as some investors believes the great 2022 sell-off will start to taper.
Unfortunately, with the US Federal Reserve raising interest rates to curb inflation, investors are still tentative to part with their earnings, especially in the stock market.
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“No guarantee” against a recession
Speaking at the European Central Bank (ECB) forum in Sintra, Portugal, Federal Reserve Chair, Jerome Powell, outlined a grim outlook for the months ahead.
Powell said there’s “no guarantee” the central bank can end runaway inflation without drastically affecting the job market.
Powell repeated the Fed’s plan of an economic “soft landing”; raising interest rates to slow the economy without causing a recession.
It’s a difficult task in the best of times but the Fed also has the double task of reign-in consumer prices without raising the US unemployment rate.
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Powell explained that one of the biggest disruptions to the global economy has been Russia’s ongoing invasion of Ukraine.
Powell said: “We believe we can do that. That is our aim but the Russian invasion of Ukraine, he said, had made the job more difficult by disrupting commerce and driving up the price of food, energy, and chemicals.
“It’s gotten harder. The pathways have gotten narrower.”
Energy disruption – a global issue
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ECB President, Christine Lagarde, said that the world is facing energy shocks, especially Europe due to its reliance on Russian oil and natural gas. Lagarde said energy capacity “was vastly underestimated” in the bank’s assessment of inflation for 2022.
Both the ECB and Fed agreed that they were slow to recognize the threat inflation would pose. The organization believed that rising prices were simply a temporary issue due to supply chain issues and hoped the economy would bounce back.
Unfortunately, inflation has kept rising and not only curbing economic growth but also reducing consumer spending. The Fed announced earlier in 2022 that will raise hikes at least three times this year.
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The US Department of Labor Department reported that consumer prices have increased by 8.6% in May compared to the same period in 2021. This is the biggest increase since 1981. In response, the Fed has pushed rates up by three-quarters of a percentage point — the USA’s biggest rate hike since 1994.
Europe has been less drastic in rate hikes, but the ECB said it too will raise rates in July, the first time in 11 years. Another is planned for September. These hikes are hoped to end inflation, currently at a record 8.1% in 19 EU countries.
These hikes from two of the world’s most powerful financial organizations are increasingly pushing the global economy into a recession again.
The bright spot, in the US at least, is that unemployment is near a record low at 3.6%, which is now at a similar level to Europe.
Recession woes
Many veteran traders and investors are already leaning towards a recession.
Powell acknowledged that “certainly, there’s a risk” of recession as countries and firms battle a historic inflation surge.
The first half of 2022 has seen the worst period for Wall Street’s S&P 500 since the 2008 financial crisis. The dismal first six months of 2022 are worse than Black Monday in 1987, which resulted in the S&P dropping by 18.7%.
As we end June 2022, the major US index is set for a decline of 20%, a drop matched only twice during the past 50 years.
With ever-dwindling consumer spending and the US economy contracting investors are asking – When will the bearish sentiment end?
The risk for Wall Street going forward is that things could get worse before they begin to get better. Another critical factor is that reduced consumer spending means fewer corporate profits, which will also negatively affect the economy.
With inflation seemingly still pushing ever higher, the risk of a recession is growing. Despite overcoming the pandemic and millions of consumers returning to the retail sector, many brands are facing new issues. The biggest hurdle so far is escalating fuel prices.
All companies are contending with higher costs for fuel, which affects their bottom line. As fuel prices soar so will the cost of essential goods and services. Sadly, consumers will face the brunt of these increases.
Companies will soon report their profit so the past quarter and already analysts are forecasting weakened growth.
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