On the way to the white part of the cycle

Rosenberg pointed out that over the past 50 years, a 20% market decline has presaged a recession precisely 100% of the time.

But Rosenberg – who thinks that the american economy has already entered recession waters – is far from alone in its grim prognosis.

A the wall street journal A survey of economists has found they now put the odds of a recession in the next 12 months at 44%, well above the 28% they estimated in April and 18% in January.

Indeed, as noted by the WSJ, a recession probability of 44% is typically only seen at the edge of or during actual recessions.

Now, it’s not hard to see why economists are getting nervous as the US Federal Reserve treads down an extremely perilous path.

The Fed is now raising interest rates aggressively to curb inflationary pressures, but hopes to avoid triggering a sharp slowdown in economic activity and a sharp rise in unemployment.

The Fed’s task is made even more difficult because higher interest rates will not affect demand for essential goods – such as food and energy – where inflationary pressures are most intense.

Moreover, as monetary policy operates with a lag of about a year, American businesses and consumers are now collapsing during an extended period of rising interest rates, amid stubbornly high inflation and growing staggering.

Because there is no doubt that the American economic activity slows down brutally.

Retail sales fell in May as US consumers felt pressure from higher interest rates and higher food and fuel prices.

Meanwhile, soaring home loan interest rates – 30-year mortgage rates soared above 6%, from around 3% in December – caused a sharp slowdown in residential construction activity. .

Confidence among homebuilders in the United States – who face a sharp rise in the cost of building materials even as demand for new homes declines – has now fallen for six straight months.

Rising interest rates are also putting pressure on US consumers who are hoarding credit at an alarming rate as their wages fail to keep pace with soaring prices.

Analysts predict that average US credit card interest rates will hit 20% by the end of the year, at a time when consumers are increasingly reliant on credit to pay for food and gas.

Moreover, the negative wealth effect will also dampen activity, as households reduce their spending to reflect the collapse in the value of their investment portfolios.

Analysts estimate that rate hikes in the United States have already reduced some $15 trillion ($21 trillion) from the value of American consumers’ holdings of stocks and cryptocurrencies, which will likely translate into a sharp decline in consumer spending.

And that will crimp economic activity.

A closely watched indicator – the Federal Reserve Bank of Atlanta’s GDPNow tracker – which tracks US economic data in real time – is now signaling zero growth for the US economy in the second quarter.

The US economy contracted at an annualized rate of 1.4% in the first three months of the year.

Weaker growth prospects

The weaker growth prospects in the largest economy in the world clouded the mood in commodity markets.

In the United States, crude oil futures ended the week at $109.57 a barrel, down more than 9% for the week, and well below the 13-year high of $130 a barrel. reached in March, following the Russian invasion. from Ukraine.

Energy stocks are also feeling the pressure, with the Energy Select Sector SPDR exchange-trading fund losing nearly 13% on the week.

But other raw materials also feel the pain. Copper, extremely sensitive to growth prospects, has fallen almost 20% since its peak in early March.

And the price of iron ore fell to around $125 a ton, down about 20% from the peak in early March.

Interest rate markets are also bracing for a sharp economic downturn. Yields on benchmark US 10-year bonds hit a high of 3.5% before the Fed’s 75 basis point rate hike last week, but ended the week at 3.2%.

This suggests that bond investors expect slowing economic growth to force the Fed to abandon plans to hike rates in the face of slowing growth.

Right now, Fed Chairman Jerome Powell is trying to reassure investors that the Fed will be able to control rapid and persistent inflation, without sinking the US economy.

“We’re not trying to induce a recession right now, let’s be clear about that,” Powell said, adding that the Fed was still trying to walk the fine line that would reduce inflation, while maintaining a solid work.

But, he noted that “these pathways have become much more difficult due to factors beyond our control.” These include the war in Ukraine and factory closures that disrupt the supply of goods and raw materials.

Still, investors doubt that the Fed has a credible card to achieve its goal.

According to its projections, the Fed expects inflation to return to 2.2% by 2024, from 8.6% currently. But he hopes to achieve this with only a slight increase in the unemployment rate – which is expected to rise from 3.7% this year to 4.1% in 2024.

Additionally, he expects U.S. economic growth to hit 1.7% this year and next, before climbing to 1.9% in 2024.

The markets, however, clearly see this as wishful thinking on the part of the Fed. They expect US economic growth to suffer as the Fed steps up its fight against inflation.

The real damage will come from reversing the wealth effect. Households lost more in stocks and crypto.

Stocks are down $12.5 trillion this year, down $13.1 trillion from the November high. After the upcoming rate hikes, the loss of wealth will be between $15 trillion and $20 trillion.

Far worse than the $6 trillion total drop in stock wealth from the bursting of the dot-com bubble at the turn of the century.

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