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Monday, May 23, 2022
HomeLatest NewsWhy the economic soft landing is getting harder for stocks

Why the economic soft landing is getting harder for stocks

Many experts say that there is only one way out of the inflation problem in the US and that it will not represent a soft landing for the markets. Central bankers and most economists say the Federal Reserve it can bring inflation closer to the target of 2% of the current level without killing economic growth. The financial institution’s own economic forecasts reflect this expectation. The current consensus is that ethe so-called soft landing is possible not only, though unlikely, is reminiscent of the earlier conventional wisdom that inflation would be transient. Now the new macroeconomic scenario is based on the assumption that inflationary pressures have already peaked.

When inflation hits a 40-year high, there is a more negative impact on many companies and consumers, considering how quickly they drive the prices of food, energy and housing. The inflation argument is even more serious than I’ve seen, focusing solely on house prices in the real estate market. “We all know that monetary policy is not the most surgical and clean”says George Goncalves, head of US macroeconomic strategy at Mitsubishi UFJ Financial Group. “Given what the Fed is currently facing and how long it has been waiting to deal with inflation, its job is only getting harder.”

There seem to be two realistic scenarios for how the next few months will go. Both will end in a recession: either the Fed fights inflation sufficiently, or it doesn’t. “The latter would lead to a stagflationary combinationwhich will lead to high prices and slow growth, which will inevitably lead to a more negative crisis,” analysts comment RBC Capital.

Behind the still optimistic view are economic data that appear to be good. But there are two issues, beyond the fact that GDP contracted in the first quarter, inflation-adjusted wages are falling and there are already signs that consumers are spending less on savings. “Firstly, growth figures are inflated”Gonsalves comments. Just look at the recent report on durable goods, as MFR’s chief US economist points out: Josh Shapirowhich showed that non-defensive orders, with the exception of aircraft, in March they rose by 9.7% compared to February.

Real estate market indicator

In addition, there are reports on the housing market, where strength is precisely the problem. Even as mortgage rates rose rapidly to their highest level since 2010, and even as the Fed says it will aggressively raise interest rates and shrink its balance sheet to fight inflation, new home builds continued to rise in March and building permits.

Other data last week showed home prices rose at the fastest monthly pace on record in February, up 20.2% from the same period last year to record highs. Thus, although mortgage rates are rising rapidly, they do not affect the housing market in any way. Torsten Slokchief economist at Apollo Global Management.

the fact is that the Fed should cool housingwhich is 40% of the consumer price index to reduce inflation, but housing also accounts for a fifth of GDP; and as more people have homes, the so-called wealth effect is closely related to real estate,” he says.

the reality is that it will take many adjustments to cool the housing marketoverwhelmed over the past two years as the pandemic pushed people into the suburbs and the suburbs, where there is a chronic shortage of supplies, and the intervention of the Federal Reserve torpedoed mortgage rates, ”adds this expert.

Mike ProcopiusCEO Procopiusnotes in a note that the increase in rates has no impact on business and has not led to a decrease in prices for sale in North American country. On the contrary, demand from investors is higher than ever, despite the fact that the construction of residential buildings costs 30% more than a year ago.

According to him, the profitability of the project has been halved, but the yield of about 4.5% is still superior to many alternatives. “The amount of capital allocated to real estate is insane.”Procopio says, adding that about $250,000 million has been earmarked for the sector through private equity and institutional investors.

This is one of the reasons why the supposed peak in inflation – and therefore the soft landing argument in the markets – is questionable. rent, an important component of the CPI, reproduces house prices over a period of 12 to 18 months, and Procopio notes that only about a third of construction costs have been accounted for so far. “From my point of view, they will never be able to get the situation under control without a recession.“, he warns.

Small businesses like Procopio’s are often cheap canaries in a coal mine. Have less protection than large companies and cannot so easily absorb price rise. They also account for half of US employment and half of GDP.

Consensus Opponents

A recession is something that many large companies are not preparing for yet. Just take a look at some of the latest comments from the CEO of Bank of America, Brian Moynihan. “The reality is that they have to take inflation out of the system”he exposes, referring to the Fed. “But our economists are not predicting a crisis,” he deepens, before predicting growth of around 3% this year and 2% next year.

There are a few people on Wall Street who stand alone and disagree with the conventional wisdom that the Fed will lower inflation without triggering a recession. Economists Deutsche Bankthe first major bank to predict a recession released a report last week saying the crisis is not only looming, but will be severe.

“Our main message is that there are good reasons to expect that inflation will continue to surprise growth and in his perseverance to stay far above the intended goals, ”he wrote. David Folkerts-Landau, chief economist at the bank and head of global research. “Therefore, we think it is likely that the Fed will have to hit the brakes even harder, and it will take a deeper recession to curb inflation.”conclude the analysts of the German bank.


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