Hello everyone, today I want to share some views on macro economy with you.
What is a growth recession? The Fed initially target for soft landing, but now to growth recession, why?
Throughout 2022, the Federal Reserve has raised interest rates 5 times in an attempt to cool the U.S. economy and reduce inflation. The goal has been to do this without sparking a recession, thereby creating a so-called “soft landing” for the economy.
Growth recession is describing an economy that is growing at such a slow pace that more jobs are being lost than are being added. A growth recession does not reach the severity of a true recession, but still involves a rise in unemployment and an economy that is performing below its potential.
Why the Fed has changed its goal?
1. Powell has seemingly concluded that it will take a tiger -- and not just a soft landing -- to attack America’s pernicious inflation, which is more than triple the Fed’s 2% target.
2. The labor market was “clearly out of balance,” with the demand for workers substantially exceeding the supply. That’s led to rapid wage rises that are incompatible with the Fed’s 2% inflation target.
“Therefore, reducing inflation is likely to require a sustained period of below-trend growth.” Powell said.
When interest rates are higher, this also means the government has to burden a higher repayment on their bonds too.
Current yield on 5-year government bonds
• UK: 4.3%
• US: 4.1%
• Greece: 4.1%
• Italy: 3.9%
Difference between interest rate and yield?
i. Interest rates are a benchmark for borrowers and
ii. Yields are for lenders. For eg. investors to the U.S. government
iii. Both interest rates and yields move in tandem together
The plunge in the pound is bad enough. It will drive up import costs, adding to pressure on the Bank of England to hike interest rates faster and higher.
The real danger will be with the continuous rise in interest rates and yet the dollar starts weakening, just like the pound. Not happening now, I am keeping watch on this closely.
The Bank of England is following the footsteps of what the Fed did during the 08 and Covid crisis, buying their own debt, the UK government bond. Desperate time calls for desperate measures, it brought some relief to the markets overnight, however, this strategy will come with a price subsequently.
US stocks and bonds rallied Wednesday after the BOE said it would buy UK government debt “on whatever scale is necessary”
The Fed is avoiding taking this path in printing money and to buy their bonds this round, because it will add more pressure to the existing inflation. Money printing dilutes its currency and the ill effect is inflation.
Apple’s clientele is the mass market, when recession hits, consumers will tighten their belt, instead of buying a phone once every two years, they may stretch it as long as the phone can last.
They did their last bit to capture as much sales with their new launch iPhone 14 as the future will be uncertain.
Overall, revenue should be lower depending on how hard and how long the recession will last. Apple shares have declined 20% so far this year, as the S&P 500 SPX, -2.11% has fallen 24% and as the S&P Composite 1500 Information Technology sector has declined 31%.
“Shares have outperformed significantly [year to date]…and have been perceived as a relative safe haven,” “However, we see risk to this outperformance over the next year, as we expect material negative [estimate] revisions driven by weaker consumer demand.”
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