Financial risks are rising in the US! - Part 2

Part 1: https://sg-stock.blogspot.com/2022/07/financial-risks-are-rising-in-us.html

The Move Index has increased again and breached a 5-year peak.

The US 5-year Credit Default Swap (CDS) is having an upward trend since 2021 because investors are buying the CDS as insurance to hedge risks (against non-payments).  This means that investors are expecting defaults to rise due to their bleak outlook.

Is the US in a technical recession now?

Let's take a look at the Atlanta Fed's estimate.

The Atlanta Fed's estimate for Q2 is at -2.1 now.  The Q1 GDP growth was -1.6 and if the Q2 estimate had materialized, this would put the US in a technical recession as defined by 2 consecutive quarters of negative growth.

Is there any validity to the above estimate?  Yes!

Let's look at the commodity index.  The CRB index was showing a significant fall recently which meant that consumer demand had collapsed as there was no demand for raw materials.

Furthermore, the EU has sky-high inflation of 8.6%.  This means that the US will have an imported inflation problem and the US FED has to continue its rate hike trajectory to contain its inflation.  However, the increases in US rates during a technical recession will exacerbate the US economic growth.

As long as the Ukraine war doesn't end, the inflation problem will be difficult to resolve because energy prices will stay at an elevated level.  All hell will break loose if Russia cuts its oil supply.

Last but not least, the Bank of America issued a dire warning recently.