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Home / Business / Why is it too early for nervous investors to embark on a recession?

Why is it too early for nervous investors to embark on a recession?

The choppy action points to the deep uncertainty in the financial markets. Is this just a soft spot, like the many others that have survived decades of economic expansion? Or is that something serious?

Jeffrey Sherman, DoubleLine Capital's Deputy Chief Investment Officer, urges investors to be cautious before making any hasty moves – in both directions.

"It's too early to squat." Sherman told CNN Business. But it was not time to add large amounts of risk, he said.

Sherman's boss, the famous investor Jeff Gundlach, said during a webcast Thursday that he sees a 40- to 45-percent chance of a US recession within six months. DoubleLine Capital, which manages assets of $ 1

30 billion, has moved up the credit spectrum as the company assesses the outlook.

The problem is that there are many mixed signals.

In the bullish warehouse, retail sales in the United States rose at a healthy pace in May. Customers who are interested in electronics, home appliances and of course online. Optimism for small businesses recovered to their best level since the fall last month.

And the Trump administration retreated from its fearsome threat of paying tariffs on all goods from Mexico.
But there were many warning signs. Broadcom ( AVGO ) a leading provider of Bellwether chips, dramatically lowered its sales forecast due to trade tensions between the US and China and a "general slowdown" in demand. China's industrial output fell to its weakest in 17 years in May.

And the most disturbing thing is that the bond market is behaving strangely.

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The yield curve – the gap between short- and long-term government bond yields – has reversed, signaling that, in the view of investors, Federal Reserve policy has become too restrictive. Inversion has been a reliable indicator of a recession in the past.

"We do not have enough signals yet," Sherman said. "The only thing that lights up red is the yield curve."

These mixed messages complicate Fed chief Jerome Powell, who continues to be pressured by the White House and Wall Street to cut interest rates rapidly.

"At the moment, nobody envies him," Sherman said.

2. Great hopes for Jerome Powell: The stock market is counting on a Federal Reserve interest rate cut sooner rather than later. While the central bank policy update announces nothing new on Wednesday next week, market expectations for a key interest rate cut in July are now 87%, according to the CME FedWatch tool.
Equities rallied on an epic rally last week, fueled by the consequences of hoping for a rate cut that would boost the US economy. It all started with Powell saying the central bank would act appropriately to sustain economic expansion in the United States. In response, the Dow, the S & P 500 and the Nasdaq Composite made the best week of the year.
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[19659002] All of this comes in only six months after the Fed gained a foothold in interest rate hikes. The central bank raised interest rates nine times in total until the end of December, after being brought to a very low level following the financial crisis. Since then, Powell has stressed that the Fed must be "patient" before taking its next step.

However, the central bank is likely to provide investors with further clues to their intentions in advance. And that's why the Fed press conference will be so closely followed next week.

There could be two ways: Powell could discuss the economic data that undercut expectations and reiterate that the central bank intends to shore up the economy, indicating a rate cut. This could lead to a stock rally. Lower interest rates are good for businesses, and what's good for business is good for the stock market.

On the other hand, Powell could also stress that the Fed needs a few extra data points before deciding on interest rates, advancing a possible interest rate cut on the September Fed meeting and leaving hopeful investors in high gear. At option two, stocks could trend lower.

"I do not think the Fed wants to disappoint the market again," said Brent Schutte, chief investment strategist for Northwestern Mutual Wealth Management, adding that Powell's Fed was the market-dependent central bank he'd ever seen ] Either way, it seems to be a volatile week.

3. Commencement of Customs Hearings: The United States Representative's Office will hold public hearings on tariffs from Monday. Companies and executives are expected to testify to industry associations.

President Donald Trump has threatened to impose tariffs on another $ 300 billion in goods imported from China – including toys, clothing, shoes, appliances and televisions. Last month, the Trump government raised tariffs from 10% to 25% for Chinese goods worth $ 200 billion.

Before the hearings of 600 companies and industry associations – including Walmart ( WMT ) Costco ( COST ) Target [1969008] GAP [ GPS ] ] Levi Strauss [ LEVI ) and [] [ TGT Foot Locke ( FL ) r – wrote to the White House and urged Trump to remove it from China and end the ongoing trade war.

"We know firsthand that the additional tariffs will have significant, negative and long-term effects on American businesses, farmers, families and the US economy," the companies said in the letter.

4. Key Test for Boeing: The Paris Air Show launches on Monday at a particularly crucial time for Boeing ( BA ) one of the two largest commercial aircraft manufacturer in the world. It's usually time for Boeing and Airbus to announce orders for hundreds of planes. However, with the 737 Max still shut down and deliveries discontinued, Boeing may have trouble announcing the typical number of orders this year. It has been announced for more than two months no order for a commercial aircraft more.

5. Next week:

Monday – Paris Air Show, US Treasury Department –

Tuesday – Adobe earnings, beginning of US Housing, US Senate Hearing on Customs

Wednesday: Fed Decision and Press Conference, Result of Oracle [ ORCL ) and Barnes & Noble ( BKS ]
Thursday: US leading indicators, key interest decision of the Bank of England, result of Darden [19659009 DRI ) Kroger ( KR ) and Red Hat

( RHT )

Friday: US Sales of Existing Real Estate, Markit Flash US Manufacturing PMI

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