IMF Warns Of ‘Gloomy Outlook’ For Global Economy, Slashing Growth Estimates

The International Monetary Fund warned on Tuesday of a slowdown in global economic growth as the world economy continues to take a hit from “increasingly gloomy developments in 2022,” including high inflation, a slowdown in China caused by Covid lockdowns and ongoing fallout from Russia’s war in Ukraine.

The IMF slashed its global growth projections, now expecting global GDP to grow 3.2% this year and 2.9% in 2023, down from previous estimates in April of 3.6% GDP growth for both years.

The group cited a slowdown in the world’s three largest economies—the United States, China and the euro area—as a reason for the revised estimates, warning that the risks to the outlook remain “overwhelmingly tilted to the downside.”

Several “shocks” have hit the global economy as it tries to recover from the pandemic, including higher-than-expected inflation worldwide––especially in the United States and Europe, a worse-than-anticipated slowdown in China caused by Covid lockdowns and “further negative spillovers” from the war in Ukraine.

The IMF also said that high inflation remains a “major problem” as prices have continued to rise in 2022, led by soaring food and fuel costs, arguing that “taming inflation should be the first priority for policymakers” worldwide.

The group now expects global inflation to hit 6.6% in advanced economies and 9.5% in developing economies this year, though prices are expected to return to near pre-pandemic levels by the end of 2024.

The IMF also slashed its growth estimates for the U.S. economy, now forecasting GDP to rise 2.3% this year and 1% in 2023, down from previous estimates of 3.7% and 2.3%, respectively, amid the impact of tighter monetary policy and reduced household purchasing power.

“The outlook has darkened significantly since April,” IMF chief economist Pierre-Olivier Gourinchas said in a statement. “The world may soon be teetering on the edge of a global recession, only two years after the last one.”

“The slowdown in China has global consequences,” the IMF said. “Lockdowns added to global supply chain disruptions and the decline in domestic spending are reducing demand for goods and services from China’s trade partners.” The group now sees China’s economy growing 3.3% in 2022—its lowest pace in four decades and down over 1% from previous estimates.

The World Bank similarly slashed its forecasts for the global economy last month, predicting GDP growth in 2022 of just 2.9%, down from an earlier estimate of 4.1%.

I am a senior reporter at Forbes covering markets and business news. Previously, I worked on the wealth team at Forbes covering billionaires and their wealth.

Source: IMF Warns Of ‘Gloomy Outlook’ For Global Economy, Slashing Growth Estimates

Critics by Pierre-Olivier Gourinchas

The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook. Many of the downside risks flagged in our April World Economic Outlook have begun to materialize. Higher-than-expected inflation, especially in the United States and major European economies, is triggering a tightening of global financial conditions.

China’s slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine. As a result, global output contracted in the second quarter of this year. Under our baseline forecast, growth slows from last year’s 6.1 percent to 3.2 percent this year and 2.9 percent next year, downgrades of 0.4 and 0.7 percentage points from April.

This reflects stalling growth in the world’s three largest economies—the United States, China and the euro area—with important consequences for the global outlook. In the United States, reduced household purchasing power and tighter monetary policy will drive growth down to 2.3 percent this year and 1 percent next year.

In China, further lockdowns, and the deepening real estate crisis pushed growth down to 3.3 percent this year—the slowest in more than four decades, excluding the pandemic. And in the euro area, growth is revised down to 2.6 percent this year and 1.2 percent in 2023, reflecting spillovers from the war in Ukraine and tighter monetary policy.

Despite slowing activity, global inflation has been revised up, in part due to rising food and energy prices. Inflation this year is anticipated to reach 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies—upward revisions of 0.9 and 0.8 percentage points respectively—and is projected to remain elevated longer. Inflation has also broadened in many economies, reflecting the impact of cost pressures from disrupted supply chains and historically tight labor markets.

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How The Yield Curve Forecasts Recession Risks

The yield curve predicts U.S. recessions remarkably well. In March, the yield curve hinted at a U.S. recession. Today, the inversion is broadening as the Fed hikes rates. A U.S. recession may coming. Here’s how the yield curve works and why it matters to financial markets.

Economists aren’t prized for their forecasting skills. The yield curve, on the other hand, has a strong track record in calling recessions. The term structure of interest rates, which is the difference between short and long-bond yields, forecasts recessions relatively accurately. The yield curve has got a recession forecast wrong just once in the past 40 years according to Nicholas Burgess of Oxford University. That’s impressive.

The yield curve is also a leading indicator of recessions since it calls recessions up to 18 months before they occur. So, the yield curve is historically among the best tools for forecasting a recession. When the yield curve inverts, you should worry. Unfortunately, now’s the time to worry. Worse, if the Fed stays on course, that inversion will increase in depth and breadth.

The yield curve does provide a mass of information, changing minute by minute. That can be confusing, so the New York Fed researched how best to interpret it in this paper. They found that the spread between three-month and ten-year yields was most predictive of recessions, though it’s a pretty close call.

Ideally, in the researchers’ view, the spread should have a negative monthly average to predict a recession rather than just a temporary dip. It also appears that deeper inversion may make the signal more powerful. Not everyone agrees with that view entirely, but most take the view that short rates rising above long rates does not bode well for the U.S. economy and deeper and longer inversion can make the signal more robust.

 Recent research from the U.S. Treasury finds that foreign yield curves have forecasting power too for U.S. recessions, so if other yield curves are inverted that can reinforce the signal from the U.S. yield curve being inverted.

Currently, the Canadian yield curve shows some inversion, but yield curves in Japan and Europe are generally not inverted. However, many central banks are expected to raise rates. That would raise the short end of the curve, creating inversion given the term structure of interest rates is quite flat globally. So the international picture may worsen.

Like any good forecast there’s also two clear reasons why the yield curve works. Knowing this is helpful. It means the forecast is less likely to be the result of accidental number crunching.

First when short term yields rise above longer term yields, that’s a big signal to banks. With an inverted yield curve, banks can make more profits from short-term lending, than from longer-term lending. That’s unusual. It can mean pulling back on financing bigger, longer term projects such as new factories and other big investment projects. That sort of pull-back in investments that help economic growth is exactly what we see in many recessions.

Secondly, the Fed raising rates is generally what pushes up shorter term interest rates. They often do this late in the economic cycle, when the economy may be starting to overheat. If we’re late in the economic cycle, that too can mean a recession is not far off. That’s exactly what’s happening now. High inflation and very low unemployment may be signs the U.S. economy is stretched currently.

Of course, we’re currently seeing one of the most aggressive patterns of rate hikes from the Fed in decades. Interestingly, the Fed knows about the yield curve’s forecasting power too. There’s a chance they ease off on hikes precisely because of the yield curve’s inversion. They don’t want a recession either. However, for the time being rampant inflation appears the more pressing concern for the Fed. It’s not an easy call, but the Fed may tolerate a recession to tame inflation.

You can see the latest U.S. Treasury yield curve data here. Currently it’s inverted from six-month out to ten-year maturities. That’s relatively broad inversion, and a bad sign for growth. In terms of the positives, the yield curve is fairly flat right now, not deeply inverted. Plus that all-important metric of 10-year less 3-month maturities is not inverted at the time of writing.

However, we can be reasonably confident inversion at the short end is coming soon if the Fed continues to hike short term rates as planned. Markets currently see the Fed raising rates around 2% over the rest of 2022, that’s almost certainly going create inversion of the yield curve when comparing three month to ten year yields. Of course, this assumes the long-end of rates doesn’t move up much, but unless long-term inflation fears really take hold, that seems unlikely.

That the yield curve is signaling recession is unsurprising. Other metrics agree. There’s a long list including: the current bear market in stocks; increasing talk about recessions; concerns about corporate earnings; early signs of weakness in housing; a softening jobs markets; together with the observation that U.S. economic growth was negative Q1. All signaling a pending recession. A recession may even already be here.

However, as an investor, it is important to remember that much of this may be priced in to markets. The very reason for weak stock returns over 2022 so far, may be the markets starting to adjust to a coming recession, or at least a reasonably mild one.

The severity of any future recession is important. Recession conjures up memories of the Great Financial Crisis of 2007-8 and the pandemic recession of 2020. As the two most recent recessions, that’s understandable. Remember though, those were both unusually severe recessions. So even if a recession is on the horizon, it may not be quite so disruptive as the two most recent ones.

Lastly, as of right now, the key metric of three-month yields hasn’t inverted below the 10-year yield. Many suspect that is the most robust recession flag. There’s still some hope we could dodge the bullet. However, if the Fed remain on their current aggressive rate trajectory, we may see that invert in later this year.

Simon is the author of Digital Wealth and Strategic Project Portfolio Management. He has previously served as Chief Investment Officer at Moola

Source: How The Yield Curve Forecasts Recession Risks

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Inflation May Get Much Worse This Summer and Could Linger Many Years

Economists at Goldman Sachs hiked their inflation projections this weekend and warned clients that recent strong price spikes seem similar to those that preceded record inflation decades ago, joining other experts in forecasting inflation will last longer than previously expected.

In a note to clients Sunday night, Goldman economists said they expect consumer prices to rise more quickly later this summer as transportation and health insurance costs continue to surge, pushing core inflation, which excludes volatile food and energy prices, from 6% in May to 6.3% in September.

Goldman expects health insurance and automobile prices—two of the largest contributors to inflation during the pandemic—should start “outright” falling by the end of this year as Covid-era growth begins to subside, pushing core inflation down to 5.5% at year-end and 2.4% in December 2023.

However, the economists also acknowledge core inflation has vastly outperformed expert projections this year, consistently rising more than expected over the last six months.

They note the surprise readings are beginning to rival those seen in the 1960s and 1970s—when long-lasting price spikes of more than 10% (solidly higher than the latest reading of 8.6% in May) contributed to prolonged periods of weak economic growth and sparked a decade of lackluster stock-market returns.

In a weekend note to clients, LPL Financial chief economist Jeffrey Roach was more bearish, saying the surge in travel-related demand is a “major concern” for inflation as housing, restaurant and accommodation prices reach new highs.

“Consumers may have to live in a world where inflation consistently runs hotter than the previous decade,” Roach said, citing concerns from central bankers like European Union’s Christine Lagarde, who last week warned there are “growing signs”—including the ongoing war in Ukraine—that suggest “supply shocks hitting the economy could linger for longer.”

“Policymakers must come to grips with a real possibility that inflation rates will not come down to their preferred targets for many years,” says Roach, adding the tight labor market is another uncertainty that could keep inflation above the Fed’s long-standing 2% target.

Inflation ran rampant in the 1970s as multiple energy crises pushed oil prices up as much as 400%, all while central bankers prioritized efforts to improve the labor market—even if it meant risking further price spikes. It wasn’t until Paul Volcker took office as Federal Reserve chairman in 1979 that the Fed pivoted to fight inflation, and though the efforts were ultimately successful, they also yielded a recession in 1982..

To help ease inflation, government is expected to possibly announce lower tariffs on certain Chinese goods, including clothing and school supplies, as soon as this week. However, some experts worry the move does nothing to address domestic supply chain issues driving up costs. The decision “probably won’t move the needle dramatically on inflation,” analyst Adam Crisafulli of Vital Knowledge Media said in a Monday email, though he says “aggressive” discounts set to start this month at major retailers like Walmart and Target could prove “far more important.”

The Fed’s inflation-fighting interest rate hikes this year have tanked stocks and sparked growing fears of a recession. Major stock indexes plunged into bear market territory last month ahead of the central bank’’s largest interest rate hike in 28 years, and the gloomy sentiment has ushered in waves of layoffs among recently booming technology and real estate companies.

“We don’t believe the Fed can stop the issues that are causing inflation on the supply side without absolutely wrecking the economy, but at this point, it looks like they are resigned to the fact that it must be done,” says Brett Ewing, chief market strategist of First Franklin Financial Services.

Source: Inflation May Get Much Worse This Summer—And Could Linger ‘Many Years’—Experts Warn

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Unemployment Will Rise And ‘Extreme’ Price Pressures Continue As Fed Hikes Risk Recession, S&P Warns

Get used to higher prices. Prices don’t drop when inflation eases. USA Today

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GST rate tweaks to push up inflation The Telegraph, Calcutta

JP Morgan Warns of An Economic ‘Hurricane’ Coming: ‘Brace yourself’

JPMorgan Chase CEO Jamie Dimon warned of a looming economic “hurricane” caused by an increasingly hawkish Federal Reserve, rising inflationary pressures and the Russian invasion of Ukraine. Dimon – who said at the beginning of May there were storm clouds forming on the economic horizon – ratcheted up his warning on Wednesday, citing fresh challenges facing the Fed as it seeks to tame the hottest inflation in a generation.

“I said there were storm clouds. But I’m going to change it. It’s a hurricane,” he said during a conference hosted by AllianceBernstein Holdings. “Right now it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle it. That hurricane is right out there down the road coming our way. We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.”

There are two main issues that Dimon said are worrying him: The Federal Reserve moving to unwind its $8.9 trillion balance sheet, deploying a less-known tool known as quantitative tightening that will further tighten credit for U.S. households as officials try to tame red-hot inflation.

The rundown of the Fed’s portfolio is poised to begin on Wednesday at an initial combined monthly pace of $47.5 billion. The Fed will increase the runoff rate to $95 billion by September, putting the central bank on track to reduce its balance sheet by about $3 trillion over the next three years. We’ve never had QT like this, so you’re looking at something you could be writing history books on for 50 years,” Dimon said.

The second matter weighing on Dimon is the Russian-Ukraine war and its effect on the price of commodities like food and oil. The bank CEO said that oil could hit $150 or $175 a barrel as a result of the conflict, which began in late February. Brent crude, the benchmark, is currently selling for $116 a barrel. “Wars go bad. They go south. They have unintended consequences,” he said.

Dimon’s comment comes amid growing fears on Wall Street that the Fed may drag the economy into a recession as it seeks to tame inflation, which climbed by 8.3% in April, near a 40-year high. Bank of America, as well as Fannie Mae and Deutsche Bank, are among the Wall Street firms forecasting a downturn in the next two years, along with former Fed Chairman Ben Bernanke.

Policymakers raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades and have signaled that more, similarly sized rate hikes are on the table at coming meetings as they rush to catch up with inflation.  Fed Chairman Jerome Powell has acknowledged there could be some “pain associated” with reducing inflation and curbing demand but pushed back against the notion of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. Still, he has warned that a soft landing is not assured.

Source: Jamie Dimon warns of an economic ‘hurricane’ coming: ‘Brace yourself’ | Fox Business

Critics by : J.P. Morgan

October data showed that consumer prices in the United States rose at a 6.2% pace relative to last year, the fastest pace in 30 years. Food prices are 5% higher than they were last year. Used car prices are up 26%. Energy prices are up 30%. Shelter, one of the most critical sub-categories, has rapidly recovered to its pre-COVID 3.5% pace. The gains are broad based, and seem to be accelerating. Compared to last month, the median component is up almost 60 basis points, the highest reading back to 1983.

Rising prices pressure all spenders, especially those with low disposable incomes. However, only focusing on rising prices ignores important context. Over the last year, the economy has added almost 5.5 million private sector jobs. Aggregate earnings are up 4% annualized over the last two years versus prices up 3.7%. Retail sales are 15% higher than they were a year ago.

Yes, gasoline prices have soared to $3.40 per gallon relative to just $2.10 one year ago. But gas was also $3.40 per gallon in 2014, when incomes were 25% lower than they are now. The only sector that is seeing any demand destruction because of soaring prices and shortages is automobiles.

Economy wide corporate profits (before tax) are 16% higher. S&P 500 profit margins actually expanded in the third quarter despite expectations for a decline. Input and labor costs are surging, but so are sales. For now, inflation just comes with the territory of a booming economy, and a lower inflation environment would likely also be characterized by a weaker labor market and a more tepid jobs recovery.

There are compelling reasons why stock markets are still close to all-time highs. Third quarter earnings surprised to the upside, global supply chain pressures seem to be getting better, not worse (Vietnamese factory operations are normalizing and shipping costs are falling), and onerous corporate tax hikes seem increasingly unlikely.

Bond markets are a little more stressed, but given the circumstances, they have been relatively tame. Two-year bond yields have moved up by about 30 basis points since the start of October because investors are starting to think that the Federal Reserve will start raising rates soon in an effort to deal with inflation. Meanwhile, 10-year Treasury bonds are yielding just over 1.5%. Why so low? Simply, because bond markets think that this surge in inflation will be temporary. Longer run inflation expectations are still well below where they were from 2000-2014.

Inflation has been strong all year and risk assets have hardly blinked. The mega cap tech sector was often cited as the one that was most at risk during an inflationary environment. The Nasdaq 100 is up over 25% this year.

What could change the picture is if the Federal Reserve makes an abrupt turn toward hawkish policy. And we don’t mean something like accelerating the pace of tapering asset purchases. We mean something like what happened in 1994, when the Fed raised rates by 300 basis points cumulatively because they thought they needed to act quickly to snuff out inflation. Even though corporate earnings grew around 20% that year, equity markets ended flat because cash got more and more attractive.

Another longer term risk is that the discourse around inflation is inherently political. Surging inflation now could make it less likely that policymakers opt for powerful fiscal stimulus during future downturns, which could delay economic recovery and be harmful for stocks.

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Technicals Point To More Stock Market Carnage Ahead

The S&P 500 index cratered 3.6% Thursday, erasing Wednesday afternoon’s gains following this week’s Federal Reserve meeting and needing a last-minute bump to close ahead of last Friday’s lowest point since May 2021.

When Federal Reserve chair Jerome Powell took the possibility of raising interest rates by 75 basis points at once off the table, investors celebrated by pushing the S&P 500 3% higher on Wednesday. But the reality of the ongoing rate-tightening cycle to address 40-year highs in inflation sunk in a day later to take off the sugar high.

Rising interest rates have contributed to a disastrous start to the year for stocks. The S&P 500 is down 13.5% from its January 3 peak, and the tech-heavy Nasdaq Composite is down 22% after a 5% crash Thursday, fully in Bear Market territory.

For investors eagerly looking for an entry point, most strategists caution that there are still some storm clouds ahead. Powell said inflation is “much too high” at Wednesday’s meeting while announcing an interest rate hike of 50 basis points and said similar increases would be considered at its next couple of meetings.

“The one thing you learn in a bear market is that forecasting the bottom is like catching a falling pitchfork. It’s a spectacular feat if you pull it off, but it’s painful and dangerous to try,” says Jim Stack, founder and president of InvesTech Research, of Whitefish, Montana. “One of the dangers in anticipating a bottom lies an understanding that the showdown between Fed policy and inflation is just beginning.”

Sam Stovall, chief investment strategist at CFRA, called Thursday a “capitulation day” and said two technical indicators–the head and shoulders pattern and Fibonacci retracement–each suggest the S&P 500 could fall to 3,800 before it hits a bottom. That would be another 8.4% down from its current level at 4,147 and 20.8% down from its peak, broaching bear market levels.

Other experts agree that investors shouldn’t necessarily expect an imminent and sustained rebound.“We’re not expecting a runaway market to the upside where we’d have a strong bottoming process and then we rebound from there,” says Yung-Yu Ma, chief investment strategist at BMO Capital Markets.

“Even when some of these things turn the corner and the market stabilizes, it’s still a market that takes a step forward and a step back and just tries to grind its way throughout the rest of the year.”

One contrarian indicator leaning bullish is the American Association of Individual Investor’s weekly Investor Sentiment Survey, which surveys its members about the direction of stocks over the next six months. The most recent survey released May 5 reported 52.9% bearish respondents versus 26.9% bullish.

The historical average for bearish sentiment is 30.5%, and according to the AAII, “Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P 500.”

Stocks are likely to remain volatile as the Fed continues to combat inflation, and the S&P 500 has already lost at least 1% on 26 trading days so far this year, more than the number of such days in all of 2021. The five biggest daily declines since 2020 have all taken place in the last two months.

Amazon, Netflix and Tesla were some of the day’s notable underperformers, each losing more than 7% while Tesla founder Elon Musk’s net worth plunged more than $18 billion. Netflix is among four S&P 500 companies that has lost more than half of their value this year, along with Paypal, Etsy and Invisalign maker Align Technologies.

“We are grossly oversold, and will continue to bounce along the bottom,” Louis Navellier, chairman and founder of wealth management firm Navellier, said. “While bad stocks bounce like rocks, good stocks bounce like fresh tennis balls.”

I’m a reporter on Forbes’ money team covering the wealthiest people and most influential firms on Wall Street. I’ve reported on the world’s billionaires for Forbes’ wealth team

Source: Technicals Point To More Stock Market Carnage Ahead

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