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Market guru warns unlikely rate cuts could ‘signal deep recession’ in H2 2023

Market guru warns unlikely rate cuts could 'signal deep recession' in H2 2023

Despite a challenging economic landscape characterized by consecutive interest rate hikes and persistent inflation, the stock market has showcased remarkable resilience in recent months. 

While many anticipated a downturn due to the tightening monetary policy and stubborn inflation, the market has defied expectations, consistently demonstrating its ability to weather these obstacles.

However, that trend may not continue for much longer as current macroeconomic conditions ‘signal a deep recession’ in the second half (H2) of 2023, according to a tweet shared by senior Bloomberg commodity strategist Mike McGlone on June 13.

‘Severe economic reset’ increasingly likely

Although the Federal Reserve (Fed) is widely expected to stop hiking rates for the time being, sticky inflation sources make the prospects of typical rate cuts also unlikely. This could ultimately lead to a steep downturn, McGlone said, citing data from Bloomberg Economics’ model – an economic forecasting tool designed to analyze and predict macroeconomic trends.

“The Bloomberg Economics’ model suggesting an ugly 2H, and the unlikeliness of typical Fed rate cuts due to sticky inflation measures, could signal a deep recession that would extend commodities downward.”

– Bloomberg analysts wrote.
Chart showing S&P 500 index movements relating 100-week average and fed funds future rates. Source: Mike McGlone

Furthermore, fresh liquidity in the market often causes risk assets such as stocks to bottom, and considering that interest rates elevated at around 5% in a year, “extraordinary headwinds are possible,” the model suggests. 

“Given the Fed has never tightened with bank deposits, leading indicators and commodities falling at such high velocity, our scenario for a severe economic reset may be gaining fuel.”

– analysts added.

Inflation eased to 4% in May

Meanwhile, the annual inflation rate in the US fell to 4% in May, marking its level in over 2 years, according to the new consumer price index (CPI) report released on Tuesday, June 13.

On a monthly basis, inflation rose by just 0.1%, while core CPI – a key inflation metric that excludes food and energy costs – remained much more resilient, surging 0.4% on the month and 5.3% year-over-year.

Still, the report relieves the pressure off Fed policymakers, with markets now pricing more than a 90% chance the central bank will not raise benchmark rates when its meeting ends on June 14. 

Featured image via Kitko NEWS YouTube

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