Bear market deepens as Fed official warns rate hikes will trigger ‘defaults’ in global economy

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Federal Reserve rate hikes continued to fuel housing and stock markets this week, but signs the job market may not be cooling fast enough could mean the economy has a lot more to lose before decades of inflation ease — which concerns about a recession are only inevitable, if not immediate.

There is “almost no evidence” that inflation has peaked, Minneapolis Fed Chairman Neel Kashkari said … [+] said at a conference on Thursday

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Important facts

The Atlanta Fed’s GDPNow model, which forecasts real-time economic growth expectations, estimated on Friday that the economy grew 2.9% in the third quarter — its highest level ever after the unemployment rate last unexpectedly dropped to 50 -year low of 3.5% had returned month.

Although strong employment is good for job seekers, David Donabedian, CIBC Private Wealth’s chief investment officer, says the report is “not good news for the Fed,” which wants to see the job market slow enough to slow inflation first to alleviate swaying to rate hikes, which have weighed on equities and fueled recession fears this year.

There is “almost no evidence” that inflation has peaked, Minneapolis Fed President Neel Kashkari said at a conference Thursday. some losses” and “some failures in the global economy” as markets digest higher interest rates.

In a note on Friday, EY chief economist Gregory Daco said he expected a recession as a result of the Fed’s aggressive actions, with job growth expected to turn negative over the next three to six months and the unemployment rate to rise to 5% by the middle of next year – suggesting more than 4 million people could be out of work.

Others are more pessimistic: Morgan Stanley told clients Thursday the economy had entered a “danger zone” where Fed policy had become so tight that “it was only a matter of time” before a “fast and furious Market Event Would Convince the Fed to Pivot; In the past, such events have included the bursting of the dot-com bubble, an oil price shock, and a drop in real estate prices.

Though the investment bank’s Michael Wilson warned that no one knows just what kind of event this might be, he believes rate hikes over the next few months will inevitably mean an “impending earnings recession” for companies weathering the slump in the economy S&P 500 could bring another 15% (it’s already down 24% this year after rising 27% in 2021).

As experts weigh whether the nation could slide into recession, the main pillars of the economy hold up as follows:

real estate market

The housing market continues to be one of the sectors hardest hit by the Fed’s rate hikes. Mortgage applications have fallen to their lowest level since 1997, according to data released Wednesday by the Mortgage Bankers Association. In a note on Tuesday, economists at Goldman Sachs said they are not yet forecasting a recession this year but see a “narrow path” to avoiding one, as the rate of property market deterioration is a key risk that spells trouble could for the general economy.

stock market

As persistent inflation forced the Fed to hike rates more aggressively than previously expected this year, equities suffered. Major stock indexes started the week with an historic two-day rally but immediately fell back to their yearly lows after payroll processor ADP reported that a better-than-expected 208,000 new jobs were added in the private sector last month, daunting Fed hopes can deviate from his aggressive attitude. After this week’s losses, the S&P is just 1.5% off a nearly two-year low.

the fed

The Fed is in the midst of its most aggressive tightening campaign since the late 1980s and is still expected to hike rates by another 125 basis points this year. However, this largely depends on the incoming economic data. Investors are hoping for better-than-expected inflation data on Thursday to justify minor hikes. As of this writing, it looks like officials will hike rates another 75 basis points in November – pushing borrowing costs to a new 15-year high.

labour market

Despite mounting waves of layoffs at large corporations, the job market has remained one of the economy’s most resilient pillars this year, and Fed officials have long pointed to the strength that warrants additional rate hikes. The September jobs report only reinforced that point, but there are early signs of a possible turnaround. Hiring intentions, which measure the number of new jobs employers plan to create, fell Thursday to their lowest level since 2011, according to careers services firm Challenger. Meanwhile, new jobless claims rose 15% to 219,000 last week, higher than forecast and ended a ten-week run of better-than-expected data.

Further reading

Better-than-expected jobs report sends markets tumbling: Here’s why (Forbes)

Unemployment rate fell to 3.5% in September as labor market added 263,000 jobs (Forbes)

Job market ‘cracks’ beginning to show as job cuts ramp up (Forbes)

Stock market poised for bigger losses as economy enters ‘danger zone’ (Forbes)