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Economic Headwinds Could Be Blowing Toward Recession

Plus500 | Monday 11 July 2022

With economic turmoil taking the headlines by storm across the world, a new era on the markets may be dawning. While over the past two years, industrialised economies showed sharp declines in Gross Domestic Product (GDP) due to lockdowns followed by swift post-pandemic recoveries, it seems that the pendulum has swung back the other way. Many analysts in the United States are now raising the spectre of a broad-based recession, which could quickly spread overseas.


Rough Start to the Year

Record-high inflation and the ripples emanating from the ongoing armed conflict in Ukraine have made maintaining stability a struggle for several major Indices so far in 2022. The New York-based S&P 500 (USA 500) had its worst six-month opening to the year since 1970, when Richard Nixon was U.S. president, falling 18.7% thus far since New Year’s. The Nasdaq (US-TECH 100) and the Dow Jones Industrial Average (USA 30) are also down by 26.5% and 14.3% respectively for the year.

Market experts have pointed to a few major factors behind this decline. First, the COVID-19 pandemic distorted market signals. As central banks across the globe moved toward a looser monetary policy in order to keep average citizens afloat in the time of quarantines, demand for a wide range of goods jumped even as trade line disruptions held supply at a low level. We are now seeing the effects of this mismatch, as inflation rates in the United States and European Union, among other major nations, have risen to the highest levels seen in decades.

A further upward pressure on consumer prices has been the disturbance to energy supply lines induced by the conflict between Russia and Ukraine. With a large portion of the world’s fossil fuels, especially to European citizens, being sourced in the resource-rich Siberian fields of the Russian Federation, the raft of Western sanctions imposed on the latter country have brought the costs of Oil and Natural Gas (NG) sharply skyward.

Now, central banks like the Federal Reserve and European Central Bank are scrambling to the other end of the monetary policy spectrum in an effort to bring these price increases down. The European Central Bank announced last month it would move to raise interest rates in the 27-country bloc following their policy summit on July 21st, the first time such a move has been made since the debt crisis over eleven years ago.

The Federal Reserve has already been on a tightening spiral for months, at times raising interest rates even more rapidly than the markets had priced in. But what do central bank policies have to do with trading trends on Wall Street?

Coming in for a Hard Landing?

Federal Reserve Chairman Jerome Powell has intimated in publicly-released remarks that the United States’ central bank under his direction will move to bring inflation closer to the ‘ideal’ rate of 2% even at the cost of a recession. Accordingly, it’s seeming ever likelier to many that high interest rates could push share prices on major New York Indices even more severely downward.

In times of economic uncertainty, such as those currently buffeting trading results, traders tend to retreat from tech and growth stocks, the returns of which are less certain. The Fed’s shift to a hawkish stance on the federal funds rate, according to many analysts, stands to strengthen this trend and push traders away from investments seen as riskier. According to some, the markets may begin ‘pricing in’ a recession before such a state of affairs actually comes to pass.

Other forewarnings of a potential decline in GDP heading down the pike is the most recent downturn in the price of Crude Oil (CL), which has lost almost 2.4% of its value so far today as of the time of writing. This could indicate that traders see a drop in business activity, which is often reliant on fossil fuels, in the cards over the short-term. International price benchmark Brent Oil (EB) has also fallen by 2.1% so far this Monday morning.  (Source:Nasdaq)

A confluence of these factors could possibly not bode well for trading results in New York and other global financial centres. Even as the Federal Reserve’s top policymakers seem hellbent on bringing price increases under control, the latent consequences of stricter fiscal policies are not lost on those watching the markets. Savvy market watchers may wish to wait for quarterly earnings reports to get a better handle on how the biggest names in U.S. industry are grappling with these headwinds, but whether a full-fledged recession or just lower growth numbers in the coming months will be seen has yet to be ascertained. 

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