It has been a good start to 2023 for the stock market, with the S&P 500 and Nasdaq up 8.9% and 16.6% respectively. The price movement seems to indicate that we have won the fight against inflation and have a high chance of avoiding a recession. Is it really this time is different?
Let's take a look.
10-2 yield curve remains inverted by the most since the 1980s
When the 10-2 yield curve inverts, it signals that investors expect the economy to slow down or enter into a recession. Which leads to a decrease in demand for long-term bonds and an increase in demand for short-term bonds, causing yields on long-term bonds to decrease and short term bonds to increase
This is considered a strong indicator of an upcoming recession, as it suggests that investors have become pessimistic about the short-term economic outlook.
It is good to know the 10-2 yield curve inversion is a very early indicator and it might take a year or two after the inversion for recession to take place.
Do not fight the FED
During the last FOMC meeting, Jerome Powell reiterated their stance that the inflation fight is not over.
The federal terminal fund rate target is expected to be 5% and they do not see any chance of a rate cut in 2023 and we will remain in tighten monetary environment throughout
Which ultimately leads to the next issue
Big tech layoffs
Google, Microsoft, Meta, Amazon have all conducted layoff exercises and given below expectations guidance, all these are efforts by the big tech to emphasize the need to cut cost in the face of an economic slowdown and the consistent high inflationary environment.
Signs might be showing with Apple posting their first revenue decline since 2019
Even though recent jobs report still comes in strong, we might yet to see the actual impart of the recent mass layoffs.
Thoughts
The markets are rallying as we are winning the fight against inflation, even the FED told us they could see that deflationary process has begun, coupled with a strong labour market, the likelihood of a soft landing greatly increases.
Never have the FED raise rates so aggressively and did not end up hurting the economy oravoid a recession.
We have to ask ourselves is it really different this time?
Only time will tell as we continue to welcome each new inflation, jobs and economy report the months ahead.
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