On Thursday, U.S. equity futures extended their declines while Treasury bond yields continued to fall as investors adjust to the possibility of a potential recession in the United States. This is in response to a series of hawkish comments from officials from the Federal Reserve regarding potential rate hikes.
The decline in stocks was further exacerbated by a twin set of disappointing economic data on Wednesday, including weaker-than-expected December retail sales and a slump in manufacturing activity in the New York state region. Investors are concerned that the Federal Reserve may be too aggressive in its rate hike path and stifle growth prospects in the world’s largest economy.
Additionally, Microsoft’s announcement of a larger-than-expected round of job cuts, which will eliminate around 10,000 jobs worldwide, also contributed to the decline in stocks. The Fed’s ‘Beige Book’ reading of economic activity also showed elevated wage pressures and muted near-term optimism from contacts around the country.
Comments from Fed officials, including Cleveland Fed President Loretta Mester, have added to these concerns. Mester stated that “I just think we need to keep going” on rate hikes and projected a peak Fed Funds rate that is north of 5%. This view was echoed by Philadelphia Fed President Patrick Harker and St. Louis Fed President James Bullard, which challenged moves in the bond market.
The bond market performance in the recent times
The bond market rally pushed yields lower, as traders see weaker growth, declining corporate earnings, and slowing inflation as signs of an eventual Fed pullback. The benchmark 10-year Treasury note yields slipped another 2 basis points in overnight trading to 3.361%, the lowest since September.
The CME Group’s FedWatch is indicating a 93.3% chance of a 25 basis point rate hike from the Fed on February 1st, with traders expecting the Fed Funds rate to peak at a range of between 4.75% and 5% in the early spring.
In terms of individual stocks, Netflix shares slipped 1.02% lower, while Tesla fell 1.8% and Procter & Gamble fell 1%.
On the other hand, sectors such as consumer discretionary, financials, and industrials may be more vulnerable to a recession. These sectors tend to be more sensitive to changes in consumer spending and economic growth. Additionally, companies with high levels of debt or a history of inconsistent earnings may be more at risk during a recession.
It’s also worth noting that while a recession may lead to a decrease in stock prices, it’s important to remember that stock prices are forward-looking and tend to recover well before the economy does. Historically, the stock market has tended to bottom out several months before the end of a recession and has typically begun to recover well before the economy reaches its trough.
