Wall Street trading week will open after the sharp price declines recorded over the past week against the backdrop of the Fed’s rise in interest rates and the bank chairman’s forecasts.
* Today (Monday) there is no trading on Wall Street on the occasion of the day of the liberation of slaves (Juneteenth), trading will resume tomorrow
The reporting season is coming to an end
Notable reports this week:
Inflation may fall faster than in the 1970s
The Federal Reserve raised its interest rate by 0.75%, completing a bi-monthly increase, the largest since 1984 at 1.25%. The interest rate forecast for the end of the year has risen to 3.4% and embodies an average rate of about 0.45% in the four meetings left for the Fed by the end of the year. According to this forecast, cumulative interest rate increases this year of 3.25% will be the highest since 1989.
Alex Zabrzynski, the chief economist of Meitav Believes that a combination of rapid financial restraint with a slowdown in developing economic activity will ultimately lead to a halt in inflation. “After all, the stagflation phenomenon does not really exist as a stable situation, except in Third World countries. As can be seen in Figure 14, in the 60s and 80s in the US, a slowdown in growth always led to a decline in inflation only sometimes it was lagging behind. Seemingly, these findings contradict recent developments in various countries that are failing to halt inflation despite rising interest rates that have been rising at an increasing rate for more than a year, which we presented in a review last week. In the countries we have presented, however, inflation has risen with high growth. “Financial restraint combined with a slowdown in the economy are expected to lower inflation, as has happened in the past,” Jabzhinsky estimates.
Source: Bloomberg, Meitav Lap Brokerage
“There is also a chance that inflation will fall faster than in the 1970s, because unlike this period, today long – term inflation expectations are still subdued. In this environment, long-term yields are expected to fall and even sharply with the first signs of a decline in inflation.”
Investing in bonds suddenly looks attractive
Further to, Uri Greenfeld, Chief Strategist of Psagot Investment House, It is estimated that the Fed and Powell itself forecast that the Fed intends to raise the interest rate to over 3% this year (allowing only one decision with an increase of less than 50 bps) and continue to raise it to almost 4% next year. “Closer to TINA (There Is No Alternative), it’s time to get to know its annoying competitor GAFY (Great Alternatives For Y’all) which the stock market likes less,” he writes in his weekly review.
He believes that when the Fed interest rate stands at 4% investment in US government bonds at a similar yield suddenly seems like an attractive investment. Moreover, with such an interest rate it will be possible to find quite a few corporate bonds with an investment rating with a return of over 5%. Such an alternative makes the stock market less interesting at a multiplier of 18.4 unless very rapid growth can be assumed .
Despite all this, “Because we are inherently optimistic, this is the place to reiterate that we believe the chances of the Fed actually raising interest rates to such a level are quite low as inflationary pressures are expected to moderate significantly towards the end of the year and during the first half of 2023.” “Transportation, etc.) are already being resolved, the recession is expected to significantly reduce consumer demand and stop the wage-inflation-wage spiral that is raging in the labor market today and we even took the risk and said that oil and food prices are not likely to rise next year.” .
The recession is still far away
Finally, Yonatan Katz and Lider Capital Markets Economists, Point out that in May retail trade fell by 0.3% (expected to be 0.1 %%), by nominal, unrealistic measurement. In the last 12 months, retail trade has risen by 8.1% compared to an increase in inflation of 8.6%. Excluding fuels and cars, retail trade rose 0.1% in May to 0.5%. The weakness in May came after two relatively strong months (March-April). As is well known, retail trade represents the consumption of products, with a recent shift in consumption from products (which rose sharply in the Corona) to the consumption of services with the removal of restrictions, such as tourism services, etc.
The investment house concludes, “Households are still sitting on a huge surplus of savings accumulated during the corona period, and a very low level of leverage allows to increase consumer debt to continue consuming, despite wage erosion. In our estimation, the recession is still far, despite the expected contraction in real estate For residence. “
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