There were a couple of Federal Reserve Presidents speaking on the day.
The gist of their views, really only ranged from we can beat inflation without triggering a recession, to we can beat inflation, but growth will be flat.
I consider both of these views to be overly optimistic.
The US is already in a technical recession. It may be headed for a technical depression. Many economists point to the strong jobs data to claim it is not really a recession? To me, this is actually a major warning signal in an economy that is clearly slowing. That employers struggle to find workers as new jobless claims have again started to trend higher, suggests there is still a state of severe dislocation, perhaps dysfunction, in the US economy from previous crises.
This is the starting point into which the previous aggressive interest rate hikes and coming attractions have yet to really begin to impact and flow through the very real economy of likely mortgage stress and historically rock-bottom consumer confidence. Serious further consumer retrenchment would appear to be a given in the current climate of apprehension. It is also the case that ever more urgent demand from Europe for US natural gas supplies and the risk of intensification of the war in Ukraine will add to energy prices in general. The moment gasoline prices begin to rise at the American bowser again, inflation may well lurch to above 10%.
The path of the Federal Reserve is clear-cut and beyond doubt. The Fed does not see the disarray of the economy.
There seems little appreciation of the profound but so far relatively hidden impact on the wealth of US householders that the now already occurring simultaneous decline in both stock and property prices will be having.
Manufacturing and services are now both clearly badly rolling over from their peaks and flirting, sometimes delving into contraction. This downturn looks certain to continue and the proffering of Chairman Powell that the economy is fundamentally strong and can absorb some pain in the fight against inflation, appear somewhat and rather dangerously, misplaced.
One cannot imagine a worse scenario for equity markets.
The economy is rolling over badly. The Fed is hiking aggressively and has declared economic pain is acceptable. Higher energy prices are here to stay and may go higher.
The ‘buy the dip’ mantra of the big global funds increasingly looks akin to choosing to run into a building and up a staircase in the midst of an ongoing major earthquake. There’s more pain ahead.
Market commentary from Clifford Bennett, chief economist at ACY Securities.
