US stocks edged lower yesterday as Wall Street became more focused over a deteriorating growth outlook that could see stubbornly high pricing pressures for the Fed into a much more aggressive tightening cycle. It doesn’t seem like we will see a deceleration in pricing pressures and that has many traders worried that the Fed will send the economy into a recession. Right now markets are functioning properly but if we see another 5% decline with stocks, credit conditions will worsen and that could provide the Fed an excuse to stop tightening so aggressively.
Tighter financial conditions will hurt the parts of the economy that are doing well and further selling of stocks could remain the theme if the S&P 500 enters a bear market. The S&P 500 is looking vulnerable here as more strategists slash their forecasts as recession risks rise.
Fed
Fed’s George affirmed the board’s stance that a half-point rate increase pace is appropriate. The Fed remains focused with fighting inflation and they will remain aggressive with tightening policy until liquidity becomes a concern.
Foreign Exchange
The dollar is in freefall as investors buy up Treasuries over concerns that the economy is headed for a rough patch. The dollar was ripe for a pullback and yesterday’s across the board weakness might continue a while longer.
US Data
A wrath of US economic data painted a gloomy picture of the economy: Jobless claims rose, the housing market is clearly cooling, another Fed regional survey showed the weakest print since early in the pandemic and the leading index turned negative. Weekly jobless claims rose from 197,000 to 218,000. The Philly Fed manufacturing outlook fell sharply from 17.6 to 2.6. Surging mortgage rates and record home prices led to a drop in April existing home sales.
Oil
Crude prices rallied as the EU nears a key deadline to pay for Russian oil with a roubles account. The oil market just has too many risks to supplies and still a strong short-term travel outlook both in the EU and US. WTI crude should be well supported at the $100 level as US production is slowly increasing.
Recession fears are rising but that impact won’t be felt for quite a while, which means the oil market won’t see imminent crude demand destruction. Crude inventories are too low for oil traders to turn bearish with WTI crude.
Gold
Gold is acting like a safe-haven again as recession fears are triggering massive demand for Treasuries, which is sending both yields and the dollar lower. The US labor market is showing signs of weakness and that could lead fears that consumer spending will deteriorate much faster than most are expecting. The dollar is getting sold against everything and that is great news for gold. Right now, investors are looking for safety and Treasuries and gold should both outperform in the short-term.
Bitcoin
Bitcoin is hovering around the $30,000 level as investors continue to shy away from stocks. A weaker dollar and bear market stock fears are making Bitcoin attractive again. It seems the fallout from all the stablecoin drama that sent cryptos sharply lower is finally fading. Bitcoin looks poised to consolidate here, but bulls should be happy to see prices are not mimicking what happens with the stock market.