Operation 'Break Things' To Continue

Danielle Park, CFA profile picture
Danielle Park, CFA
4.68K Followers

Summary

  • The Fed’s GDP growth forecast was lowered to just .2% in 2022 and 1.2% in 2023 and well below the 2.5% US GDP growth capacity estimate.
  • The US 2 and 30-year Treasury yield curve inverted 58 bps, the most since 2000.
  • If December 2022 ends this hiking cycle, followed by loosening efforts again in the first half of 2023, it could suggest a stock market bottom sometime in late 2023.

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Hiking the US Fed funds rate a further .75 yesterday, now 3 to 3.25% (from 0 to .25% in March), Chair Powell acknowledged that unemployment will rise, adding: "Nonetheless, we're committed to getting inflation back down to 2%." Powell reiterated that his board plans to raise US base rates a further 1.25% (4.25 to 4.5%) by year-end.

The Fed's GDP growth forecast was lowered to just .2% in 2022 and 1.2% in 2023 and well below the 2.5% US GDP growth capacity estimate - a whopping slack in resource utilization. This is the closest a central bank will ever come to acknowledging an incoming recession.

The US dollar index (DXY) leapt 1% to a 20-year-high above $111, and stock and commodity markets slumped, with every S&P 500 sector lower on the day.

The US 2 and 30-year Treasury yield curve inverted 58 bps, the most since 2000, with short-term yields rising and long-term rates rolling over on the weakening economic outlook.

Word to the wise: historically, equity markets have not bottomed until after the Fed abandons its tightening plans and slashes rates again for several months, dropping short yields and re-steepening the yield curve.

If December 2022 ends this hiking cycle, followed by loosening efforts again in the first half of 2023, it could suggest a stock market bottom sometime in late 2023. Only time will tell.

The last six months of falling asset prices have been about rising interest rates (lower discounted cash flows), negative real wages and slowing consumption (sales). The following six will likely be focused on negative earnings trends and financial contagion, with credit strain and defaults spreading through highly levered corporations and households globally.

As central banks now break the asset bubbles they helped to form, the return of principal is back in vogue, and the yields for cash and the most secure bonds - the highest since 2007 - offer an attractive harbour from capital implosion. This is when North American government bonds typically outperform.

Disclosure: No positions

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

Danielle Park, CFA profile picture
4.68K Followers
Portfolio Manager, financial analyst, attorney, finance author, a regular guest on North American media. Danielle Park is the author of the best selling myth-busting book “Juggling Dynamite: An insider’s wisdom on money management, markets and wealth that lasts,” as well as a popular daily financial blog:www.jugglingdynamite.com Danielle worked as an attorney until 1997 when she was recruited to work for an international securities firm. A Chartered Financial Analyst (CFA), she now helps to manage millions for some of Canada's wealthiest families as a Portfolio Manager and analyst at the independent investment counsel firm she co-founded Venable Park Investment Counsel Inc. www.venablepark.com. For two decades, Danielle has been writing, speaking and educating industry professionals and investors on the risks and realities of investment behaviors. A member of the internationally recognized CFA Institute, Toronto Society of Financial Analysts, and the Law Society of Upper Canada. Danielle is also an avid health and fitness buff.

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