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Stocks Fundamental Forecast: Bearish
- Dow Jones , S&P 500 and Nasdaq 100 suffer worst 2 weeks since 2020
- Traders getting more concerned about a recession as Fed fights CPI
- Data next week will reveal more information on growth, not inflation
Over the past 2 weeks, futures tracking the Dow Jones, S&P 500 and Nasdaq 100 tumbled 8.71%, 10.05% and 9.63% respectively. You would have to go back to the onset of the pandemic in early 2020 to see the same performance. Volatility has been on the rise, with the VIX market 'fear gauge' up about 25 percent during the same timeframe.
This past week, we saw a rapid repricing of Federal Reserve rate hike expectations. That is because earlier this month, another unexpectedly strong US CPI report crossed the wires. Hence the 75-basis point hike delivered last week, where just shortly ago, the markets were only expecting 50. A more aggressive Fed means that there are rising concerns about the health and vigor of the world's largest economy.
US CPI and real GDP expectations for 2023 (YoY) are outlined in the chart below. Since about March, we have seen economists boost inflation estimates for next year. This is as bets for real GDP, which considers changing prices, have been dwindling. Earlier this year, the US economy was expected to grow 2.5% in 2023 in real terms. Now, that figure has fallen below 2%.
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US Economic Estimates for 2023All Eyes on PCE and NFPs
As expected, Wall Street rallied on the day of the Fed. That is because it seemed the central bank restored confidence in its ability to tame runaway inflation. However, that rally fell apart when disappointing housing data dropped the next day. Going forward, markets will be closely monitoring economic prints to gauge recession woes. Data from Bloomberg has odds of a recession at 31.5% next year, up from 20 prior.
To get a closer look at how inflation versus growth prints have been impacting the economy and stock market, have a look at the next chart below. The magenta line is the spread of CPI versus real GDP bets mentioned earlier in this article. Since the beginning of this year, the line has been rising, indicating inflation increasingly eating away at growth expectations.
Unsurprisingly, Federal Reserve rate hike bets in one year have been rising in tandem (black line). That is the anticipated battle that markets see the Fed taking as inflation continues to wreak havoc on the economy. Meanwhile, the S&P 500 has been falling amid a combination of rising uncertainty over growth versus inflation and what higher interest rates mean for the appeal of stocks versus bonds.
With that in mind, all eyes will continue to remain on US economic data. The week ahead notably cools off in this regard. Data like home sales, mortgage applications and manufacturing PMI will cross the wires. These will offer a better idea of how growth is faring as opposed to inflation, so the focus might be on recession concerns. This uncertainty will likely continue weighing on risk appetite in the near term.
Why Wall Street Has Been Falling
--- Written by Daniel Dubrovsky, Strategist for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
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