By Nicholas Jasinski
| Thursday, July 28
Contraction. Today began with
official data showing that the U.S.
economy shrunk for a second-straight quarter in the April-May-June
period. The Bureau of Economic Analysis' preliminary
estimate for second-quarter gross domestic product showed
a 0.9% annualized rate of decline, following a 1.6% rate of decrease in the
first quarter.
That's not technically enough to declare the
U.S. economy to be in a recession (Barron's William
McCormack has an explainer here),
but it has investors reconsidering the potential for future Federal
Reserve interest rate increases.
CME's FedWatch tool now shows a roughly 20%
chance of a third-straight 75 basis point hike in September; it was 25%
yesterday evening and 50% before the Fed’s policy meeting yesterday
afternoon. The central bank raised its target interest rate range by 75
basis points, to 2.25% to 2.50%, yesterday.
Futhermore, futures pricing now
implies two 25 basis point rate cuts between February and July
2023. The bond-futures market is betting the Fed will rapidly slow down the
pace of its interest rate increases by the end of this year, then rapidly
switch to easing policy. That would require either declaring victory in its
fight against inflation—or giving up the battle altogether in favor of rescuing
the economy.
The shifting expectations have shown up in the
bond market. Yields have dropped as bond prices have rallied this week, with
the 10-year U.S. Treasury note yield today dropping to
2.68%, its lowest level since early April. The 2-year yield, meanwhile, fell to
2.87% today.
Although it steepened slightly today, the
Treasury yield curve remains deeply inverted—reflecting the market's
expectation that rates will rise, then fall, over the coming year. An inverted
yield curve has been a reliable recession indicator in the past. The silver
lining of a recession would be if its dampening effect on demand successfully
brings down inflation. But that's still a big "if."
The stock market took a bad-news-is-good-news
approach to the GDP data, rallying for a second day. The S&P
500 rose 1.2%, the Dow Jones Industrial Average
gained 1.0%, and the Nasdaq Composite
added 1.1%.
DJIA: +1.03% to 32,529.63
S&P 500: +1.21% to 4,072.43
Nasdaq: +1.08% to 12,162.59
The Hot Stock: Constellation Energy +16.3%
The Biggest Loser: Stanley Black & Decker -16.1%
Best Sector: Real Estate +3.7%
Worst Sector: Communication Services -1.1%
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