Based on the following articles, we can come up with the following trading recommendations:
– The U.S. economy could fall into recession later this year, which means U.S. stocks could see a sharp decline, while U.S. bonds and the U.S. dollar could be supported by safe-haven demand. Therefore, we may consider shorting a U.S. stock index, such as the Dow or Nasdaq, while going long U.S. bonds and the U.S. dollar.
– The Federal Reserve may cut interest rates in July, which will have a negative impact on the dollar and a positive impact on safe-haven assets such as gold. Therefore, we may consider reducing our position in the U.S. dollar appropriately before July while increasing our position in gold.
– The US debt ceiling impasse could trigger a political crisis and a credit crisis, which would have a knock-on effect on global markets. Therefore, we may consider adding liquid assets such as cash while reducing riskier assets such as emerging market stocks or bonds ahead of the debt ceiling deadline.
The original article is as follows:
Caixin, May 15 (Editor Xiaoxiang) – As we enter 2022, a growing number of economists and market participants say that the U.S. economy may fall into recession later this year, dragged down by weakening growth momentum, aggressive Fed rate hikes, the ongoing Russia-Ukraine conflict, the festering banking crisis and the debt ceiling impasse. And this speculation has now gradually got the Federal Reserve’s “default” ……
According to the New York Fed’s latest recession probability model, the odds of the U.S. economy falling into recession sometime in the next 12 months have risen to the highest level in 40 years. The model shows that the probability of the U.S. falling into a recession in the next year has risen to 68.2%, the highest level since 1982.
The model is based on the spread between the 3-month U.S. bond and the 10-year U.S. bond yield to be measured. The model now shows a probability of recession that exceeds the level of November 2007 – that is, shortly before the outbreak of the subprime mortgage crisis of 40% value.
For the past several months, the U.S. economy has been expected to reveal a slowdown in real GDP growth and weakness in the labor market. And in the banking turmoil triggered by the collapse of Silicon Valley Bank, economists at the Federal Reserve have also predicted a “mild recession” in the economy.
As mentioned in the minutes of the Fed’s March meeting, “Given the Fed staff’s assessment of the potential economic impact of recent banking sector developments, the staff’s forecast at the March meeting included a mild recession beginning later this year and a recovery within the next two years.”
Former U.S. Treasury Secretary Larry Summers also said he believes the likelihood of a recession is “probably in the 70 percent range.” “When I put together the lags associated with monetary policy, the risk of a credit crunch, the need for sustained action around inflation, geopolitical or other risks that could pose a shock to commodity prices, 70 percent is the range of my forecast.”
Indeed, the treacherous backdrop of the banking crisis coupled with another Fed rate hike in May and the continued escalation of recent tensions over the U.S. debt ceiling is causing many insiders to even expect the Fed to possibly cut rates as early as July.
At the same time, the financial markets are also quietly shifting the trading sentiment.
A recent Bank of America survey shows that investors are more bullish on long-term U.S. bonds than they were at the peak of the financial crisis in 2008, and they are betting that the global monetary tightening phase is coming to an end. In addition, exposure to dollar duration is at its second highest level in two decades, behind only the early panic phase of the new crown epidemic in March 2020. According to Bank of America, this is part of a global end-of-cycle asset allocation rotation, with money flowing into longer-term bonds, represented by the U.S.
And according to S&P Global Market Intelligence, institutional investors have withdrawn a net $333.9 billion from equity markets over the past 12 months, while retail investors have also withdrawn $28 billion. Billions more dollars flowed into cash equivalents in the week ended May 10, pushing total money market fund assets to a record $5.3 trillion, according to the Investment Company Institute.
This week will be the best window to observe the Fed’s movements?
For investors in global markets, there is no doubt that this coming summer will be a critical “crossroads” for the global macro space. On the one hand, the U.S. debt ceiling impasse will be a constant nerve on Wall Street, while on the other hand, the Fed, which is coming to an important window of policy change, will also have to show the market its next direction.
From the financial calendar, this week a large number of Fed officials will appear, the schedule can be described as dense, which will probably be the best window to observe the Fed’s movements. And among the officials speaking, even Fed Chairman Jerome Powell will be included, and he will make his grand finale on Friday local time ……
Here is the specific schedule of Fed officials’ speeches (Beijing time):
19:30: Atlanta Fed President Bostic interviewed by CNBC
20:30: Chicago Fed President Goolsbee interviewed by CNBC (with voting rights this year)
20:45: Atlanta Fed President Bostic gives a welcome speech at a conference hosted by the Atlanta Fed
21:15: Remarks by Minneapolis Fed President Kashkari (voting this year)
00:30: Remarks by Richmond Fed President Balkin (voting this year)
02:00: Atlanta Fed President Bostic speaks
05:00: Fed Governor Lisa Cook delivers commencement address at UC Berkeley (voting this year)
20:15: Cleveland Fed President Mester speaks
20:55: Atlanta Fed President Bostic gives opening remarks at an event
22:00: Fed Governor Barr makes a testimony statement before the House Financial Services Committee (voting this year)
00:15: New York Fed President Williams speaks on the economic outlook and monetary policy (voting this year)
02:30: Chicago Fed President Goolsbee speaks (voting this year)
03:15: Dallas Fed President Logan hosts a meeting (voting this year)
07:00: Atlanta Fed President Bostic and Chicago Fed President Goolsbee participate in a panel meeting on the economic outlook and monetary policy
21:05: Fed Governor Jefferson speaks on the economic outlook (with a vote this year)
21:30: Federal Reserve Governor Barr makes a testimony statement before the Senate Banking Committee (with voting rights this year)
22:00: Dallas Fed President Logan speaks at the Texas Bankers Association Convention (voting this year)
20:45: New York Fed President Williams delivers the keynote address at the Fed Board of Governors event (voting this year)
21:00: Federal Reserve Governor Bowman participates in a discussion session at the Bankers Conference (voting this year)
23:00: Fed Chairman Powell, former Chairman Bernanke attend a panel discussion on monetary policy (voting this year)
Earlier, Jefferson, the current Fed governor who was just nominated as Fed vice chairman, said over the weekend that the progress of U.S. inflation this year has been mixed, and that the impact of policy will take time to penetrate the entire economy, which is still on track.
Jefferson said in a prepared speech at Stanford University’s Hoover Institution that the decline in inflation in core commodity prices is occurring at a slower-than-expected pace, with the exception of used car prices, which unexpectedly fell in March. The impact of monetary policy on the economy and inflation has a long and varying lag, and the full impact of our rapid tightening of monetary policy may not yet be apparent.
It is worth noting that at the same Stanford University event, the Fed’s “King of Hawks”, St. Louis Fed President James Bullard is signaling that policymakers are close to completing a rate hike.
Bullard said, “in the current macroeconomic situation, monetary policy is currently at the low end of a sufficiently restrictive range,” but he also pointed out that restrictive areas can change because of upcoming data.
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