Dow went up 64, but decliners over advancers better than 2-1 & NAZ was off 23. The MLP index fell 2+to the 192s & the REIT index gave back 4+ to the 405s. Junk bond funds slid lower while anticipating higher interest rates & Treasuries were purchased, reducing yields (more below). Oil gained 1+ to 113 & gold was off 3 to 1817.
AMJ (Alerian MLP index tracking fund)
The final revision of first-qtr GDP confirmed a larger contraction of the US economy than earlier readings, supporting the view that a recession is either in progress or coming as inflation rages & stocks head for the worst H1 since 1970. The latest report released by Commerce Dept showed that GDP, the broadest measure of goods & services produced across the economy, shrank by 1.6% on an annualized basis in the 3-month period from Jan-Mar. The initial report released in Apr showed GDP shrank by 1.4% on an annualized basis. The contraction last qtr was the first drop in GDP since Q2-2020 when the US was deep in the throes of the COVID-19 recession. The 2022 drop also followed a robust 6.9% expansion in the final 3 months of 2021. Economists expect some slowdown in the economy as the Federal Reserve continues to bump up interest rates to cool inflation & will be looking for indications of whether a full-fledged recession, defined by 2 consecutive qts of contractions, is brewing.
GDP contraction deepens giving recession clues as inflation soars
Federal Reserve Bank of Cleveland Prest Loretta Mester said that if economic conditions remain the same when the US central bank meets to decide its next monetary policy move in Jul, she will be advocating for a 75 basis point hike to interest rates. The Fed's path of monetary tightening has become a key driver of market activity in recent months as the central bank looks to act aggressively to rein in soaring inflation, while acknowledging the risk that steeper interest rate rises will increase the likelihood of an economic recession. The Fed opted for a 75 basis point hike to its benchmark rate earlier this month, the biggest increase since 1994, with inflation running at a 40-year high. Mester, a voting member of the FOMC, said the Jul meeting will likely involve a debate among FOMC policymakers over whether to opt for 50 basis points or 75 basis points. “If conditions were exactly the way they were today going into that meeting — if the meeting were today — I would be advocating for 75 because I haven’t seen the kind of numbers on the inflation side that I need to see in order to think that we can go back to a 50 increase,” she added. Mester said she will be making an assessment of supply & demand conditions over the coming weeks prior to the meeting in order to determine the preferred path of monetary policy tightening. The “dot plot” of individual FOMC members expectations places the Fed's benchmark rate at 3.4% by the end of the year, from its current target of 1.5%-1.75%. “I think getting interest rates up to that 3-3.5%, it’s really important that we do that, and do it expeditiously and do it consistently as we go forward, so it’s after that point where I think there is more uncertainty about how far we’ll need to go in order to rein in inflation,” Mester continued.
Fed’s Mester backs 75 basis point hike in July if conditions remain the same
Treasury yields slipped as investors continue to assess the economic outlook amid rising recession fears. The yield on the benchmark 10-year Treasury note was down 7 basis points to 3.13%, while the yield on the 30-year Treasury bond dropped 6 basis points to 3.246%. Yields move inversely to prices. As Q2 draws to a close tomorrow, concern over a slowing economy & aggressive interest rate hikes from the Federal Reserve continue to dominate market sentiment. Investors are also looking ahead to comments from Federal Reserve Chair Jerome Powell at a ECB forum. An attempted rally for risk assets fizzled out yesterday after a disappointing consumer confidence reading, which came in at 98.7, below the estimate of 100. The Conference Board's one-year ahead inflation expectations hit a record high of 8.0%, exceeding the 7.7% seen in 2008, while the Richmond Fed's manufacturing index came in at -19, its lowest since May 2020 & well below expectations of -7.
Treasury yields fall as traders track economic data, Fed remarks
Dow Jones Industrials
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