Medicare Agent News: Inflation Is Scarier Than a Recession

Tuesday, July 5, 2022

Inflation Is Scarier Than a Recession

By Nicholas Jasinski | Tuesday, July 5

Retreat and Rally. Oil prices plunged today, while most major stock indexes staged a full-day comeback to erase morning losses and close in the green.

West Texas Intermediate crude oil dropped 8.2% today, to $99.50 a barrel, and Brent—the international benchmark—tumbled 9.5%, to $102.77. It's the first close below $100 a barrel for WTI since early May.

The sharp declines were pinned on recession fears. If economic activity slows meaningfully, that would reduce demand for burning oil and gas—factories would produce less, people would drive and fly less, and so on. That could bring demand closer to the limited supply that had pushed WTI about 40% higher in 2022 before today's drop.

And if a recession does in fact materialize, there could be plenty more downside in store for the oil price. Here's Ben Levisohn writing today:

During the 2007-2008 financial crisis, oil prices peaked [near $150] a barrel and then quickly fell below $40 a barrel. Eventually, prices settled at around $90 a barrel and remained there for four years. [In the case of a recession,] Citigroup analysts see oil falling to $65, and it could fall further to $45 a barrel by the end of 2023 if oil-exporting countries don’t intervene to reduce supply.

There were fireworks over in the stock market today as well, with major indexes opening deep in negative territory today then spending the rest of the session climbing higher. The S&P 500 overcame a 2.2% loss this morning to finish 0.2% higher. The Nasdaq Composite closed up 1.8% after being down a similar amount this morning, and the Russell 2000 rebounded from deep in the red to finish up 0.8%.

Only the Dow Jones Industrial Average couldn't quite retrace its losses: the index closed down 0.4%, still well off its worst levels of the morning.

The same recession fears that weighed on oil today seemed to be behind stocks' early losses. But as the oil price declined, investors began to see the silver lining. A potential recession is scary, but what makes it particularly concerning is if it coincides with still-high inflation.

That double-whammy would mean the Federal Reserve might have to continue increasing interest rates despite the faltering economy in order to get a handle on inflation. And that could deepen a potential recession.

A major driver of this year's spike in inflation has been the rapid rise in energy costs. If oil and gas prices come down and bring inflation down with them, the U.S. economy might still enter a recession, but it would give the Fed more room to respond in a supportive manner.

That thinking was confirmed in the bond market's reaction today. The yield on the 10-year U.S. Treasury note declined 0.09 percentage point, to 2.81%. That's its lowest yield since late May. The lower 10-year yield reflects reduced expectations of Fed interest rate hikes and slower economic growth over the coming years.

Bottom line: It may take a recession to get inflation under control in the U.S., and judging by markets' reaction today, investors would be more on board for an economic contraction if it means the Fed can ease up on lifting interest rates.