Dow pulled back 140, decliners over advancers a hefty 5-1 & NAZ lost 168. The MLP index fell 2+ to the 212s & the REIT index was off 3+ to 380. Junk bond funds saw selling & Treasuries were heavily sold, taking Treasury yields substantially higher (more below). Oil edged higher in the 83s & gold inched up 3 to 1679.
AMJ (Alerian MLP index tracking fund)
Federal Reserve Chair Jerome Powell is seemingly walking away from the promise of a soft economic landing as the central bank tries to wrestle inflation under control with the most aggressive interest rate hikes in decades. For months, Powell has argued that a soft landing – the sweet spot between curbing inflation without crushing growth – is possible, but he seemed to abandon that stance on Wednesday. Speaking after the Fed voted to lift the benchmark federal funds rate by 75 basis points for the 3rd straight month, Powell conceded that a recession is possible & that securing a soft landing will be "very challenging," though he cautioned that no one knows if the tightening campaign will lead to a downturn, & if so how significant it will be. "The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer," he added. "Nonetheless, we’re committed to getting inflation back down to 2%. We think a failure to restore price stability would mean far greater pain." In addition to the large rate hike, Fed officials laid out an aggressive path of rate increases for the remainder of the year. New economic projections released after the meeting show policymakers expect interest rates to hit 4.4% by the end of the year, suggesting that another 3-qtr percentage point increase is on the table. Officials expect to continue raising rates in 2023, before stopping at a termination rate of 4.6% – well into restrictive territory – & eventually modestly lowering rates beginning in 2024. Powell said the current range of 3.0-3.25% is already at a point that may be considered "restrictive." The updated forecasts also showed unemployment climbing to 4.4% by the end of next year, up from the current rate of 3.7%. That's significantly higher than Jun, when policymakers saw the jobless rate inching up to 3.7%. Estimates for economic growth, meanwhile, were marked down to 1.2% in 2023 & 1.7% in 2024. "We have got to get inflation behind us," Powell said. "I wish there were a painless way to do that. There isn’t." Economists widely agree the risks of a recession climbed considerably this year & that avoiding a downturn in the near future will be increasingly difficult as the Fed tightens monetary policy.
Fed abandons promise of soft landing while wrestling inflation
The number of Americans filing for unemployment benefits rose slightly last week but remained near a 4-month low, a sign the labor market remains healthy despite an increasingly dark economic outlook. Figures from the Labor Dept show that applications last week rose to 213K from the downwardly revised 208K recorded a week earlier. That is still below the 2019 pre-pandemic average of 218K claims. Continuing claims (the number of Americans who are consecutively receiving unemployment aid) fell to 1.37M, down by 22K from the previous week's revised level. One year ago, nearly 11.2M Americans were collecting unemployment benefits.
Jobless claims rise to 213,000 after declining for five weeks straight
The yield on the 2-year Treasury note hovered around 4.1% today as the gap with the 10-year Treasury widened, further inverting the yield curve. The policy-sensitive 2-year Treasury was last up nearly 10 basis points to 4.092%. Earlier in the day, it had soared as high as 4.132%, coming close to levels last seen in 2007 when it reached 4.138%. The benchmark 10-year Treasury was last at 3.561%, after rising by nearly 5 basis points It had hit 3.64%, a high not noted since 2011 yesterday after the Federal Reserve's rate hike announcement. The gap between the 2-year &10-year notes widened as much as 56.8 basis points, further inverting the yield curve. Some analysts view short-term rates being significantly higher than long-term rates as a sign of a recession. Yield & prices have an inverted relationship, with one basis point equaling 0.01%.
Economic damage from higher interest rates is sinking into the thinking of investors. Rates keep climbing & investors who have become addicted to low interest rates are learning about disruption to the economy that higher interest rates can bring. The outlook for stocks is glum.
Dow Jones Industrials
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