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From Rates Fear To Recession Fear
The S&P 500 Index closed out its worst first half of the year since 1970. In the past week, the main US equity indexes surrendered a portion of the previous week’s gains, as the market now anticipates that the Fed’s fight against inflation would push the economy into recession. Wednesday May personal consumption expenditures (PCE) indicated that US consumers were pulling back. That was enough to push the Atlanta Fed’s GDPNow model estimate of annualized growth in Q2 down to -1.0%, which would mean that the US economy meets the definition of a technical recession—two consecutive quarters of negative growth. Much of the week’s economic data missed consensus expectations, and some signals suggested that economic activity might even be slowing – although it remains in expansion. The silver lining for investors in the PCE data was a downside surprise in inflation signals. The core (less food and energy) PCE price index came in at 4.7% for the 12 months ended in May, the lowest level since November. Along with the sluggish economic data, this pushed the yield on the 10-year U.S. Treasury as low as 2.79% in Friday trading, its lowest level in a month. High yield bonds traded lower along with equities. In Europe, shares fell on fears that soaring inflation and rising interest rates could hit earnings and tip economies into a recession. In Asia, Japan equities declined while Chinese stocks advanced on the back of strong factory data and easing covid restrictions for travelers.
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Most US equities indexes ended the week lower, although the tech-heavy Nasdaq Composite advanced modestly and cleared the 20,000 mark for the first time. The Russell 2000 Index recorded a second consecutive week of underperformance against the S&P 500 Index. Growth stocks posted a third consecutive week of outperformance versus value, thanks in part to gains in shares of Tesla (12%) and Alphabet (8.4%). On the macro-economic side, stagflation fears started to rise once again. Indeed, YoY CPI and PPI both accelerated. Meanwhile overall macro surprises disappointed for the fourth week in a row: on Thursday, the Labor Department reported a surprise jump in weekly initial jobless claims to a two-month high of 242,000.