‘It’s recession trading’: Stocks, yields and oil decline

(Bloomberg) – As US stocks begin the week after having their worst first half since 1970, there’s only one way to describe their performance, according to Neil Dutta.

“This is recession trading,” said Renaissance Macro Research chief economics officer. “There is no other way to describe it.”

Adding to his list of reasons are falling Treasury yields, falling oil prices, widening corporate credit spreads and a rising dollar.

Read: Recession doubtful Neil Dutta turns cautious after Fed signals

The S&P 500 fell 2.2% on the first trading day of a shortened week amid a flight from risky assets. Treasury yields fell, with the 10-year rate hovering around 2.8%. Meanwhile, the dollar has risen, making commodities priced in the currency less attractive. Oil sank, trading below $100 a barrel.

To be clear, Dutta doesn’t think the US economy is currently in a recession.

“We’re not in one right now, but the markets are a discounting mechanism and I think the markets see the economy potentially going into one or getting closer to it,” said Dutta, an industry watcher. economy widely followed in the financial markets. “We’ve come a long way in pricing during a recession in the markets, but I don’t think we’ve come to that.”

His stance is a reversal from an earlier call, when he said he didn’t see a recession in the cards. Now he is less confident in the U.S. economy as inflation accelerated to a new four-decade high, prompting the Federal Reserve to raise its benchmark rate by 75 basis points, the most since 1994.

“I don’t think it’s inevitable, but I think a lot of it depends on what the Fed does,” he said, referring to the likelihood of a recession. “If the data suggests the Fed should deviate from its current policy approach and it doesn’t, then we have a problem. To me, that’s the problem.

The Fed has “locked” itself into an aggressive tightening course, perhaps in an effort to avoid the mistake officials made at the start of the pandemic when they called inflation “transitional,” did he declare. But what if inflation has already peaked? Dutta thinks headlines for July will moderate “quite considerably” as oil prices fall.

Still, if a recession does come, expect one thing, he said: market volatility. Predicting one, however, is not as straightforward as many market watchers may agree.

“A call for recession cannot be made if the labor market does not participate,” Dutta added. “The US economy continues to create jobs. So there is no way the recession (if it occurs) is dated June 2022.”

With fears of a recession front and center, investors will receive a further update on the US labor market on Friday. The monthly payroll report is expected to show a gain of 250,000 jobs for June, while the unemployment rate is expected to hold steady at 3.6%.

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