It is inevitable that the US will encounter a hard landing with its latest 50bp rate hike because the US Fed is way behind the inflation curve.
The latest job openings and quits statistics showed a huge mismatch in the labour market and this would cause the employment cost to spike as shown below. The sticky wage model shows that salary increment is a long-term inflation issue because it is very difficult to reduce after an increment.
Subsequently, elevated inflation will cause a recession when the sky-high inflation is not contained. According to the modified Taylor rule calculation, the fed fund rate should be above 10% to contain the 8.5% inflation. However, the fed fund rate won't even exceed 3% by the end of 2022 at the current pace of rate hikes.
https://sg-stock.blogspot.com/2022/05/will-us-be-heading-for-soft-or-hard.html
Conversely, the UK has a 7% inflation and it has just hiked its rate to 1% which is a 13-year high. Furthermore, the UK is also projecting a 10% inflation for the coming months which is even higher than the US when the UK has a lower inflation rate than the US (8.5%) now.
Therefore, it is highly likely that the US will encounter a hard landing as stated by the former NY Fed chief.
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2 comments:
With the previous mentioned on recession, do you reckon that Powell will change his last statement to 75bp raise instead? Although recession started already but I wondering when the US stock financial crash or tipping point to be triggered, as the US fed seem calming and handle the stock market well.
With foresee US stock moving downtrend, will the bank or finance sector beneficial from the regular interest rate hike within 2 year? reason being how to adjust the portfolio
On the other side, how would you project the China stock market as you are optimistic on China growth compare others country.
According to the Fed meeting, Powell had ruled out a 75bp hike. Instead of a 1 time 75bp hike, he would raise 50bp for the next few meetings (June & July but August is still an unknown).
A US recession has not started because a technical recession is defined as 2 consecutive quarters of negative growth. The US Q1 growth was -1.4% but Q2 was still unfolding. The US stock market was not stable either because it was up significantly on the Fed meeting day and down significantly the next day (last night).
The real effective rate (TIPS yield) has turned positive and this will change the investors' mindset. When the TIPS yield was negative, the investors were making losses with the treasury yields after factoring in inflation and they had to seek higher investment yields from stocks. When the TIPS yield turns positive, the reverse is true. The conventional portfolio principle is 40-60 (40% bonds & 60% stocks) and this will change when the TIPS yield is positive.
https://tradingeconomics.com/united-states/10-year-tips-yield
The conventional wisdom is that the banking and financial industry will do well in a rate-rising environment. However, the banking and financial industry will not escape unscathed in a recession caused by the high inflation because there are lesser businesses to do and the banks have to sell the repossessed assets at much lower prices.
China won't be doing well in the first half of 2022 because of the pandemic but it will rebound in the 2nd half due to the quantitative easing (QE) policies implemented to jolt the economic recovery. China will try its best to hit the projected GDP growth target of 5.5% set earlier this year. Even if China only grows 5% for 2022, it is still much better than many countries including the US.
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