Wall Street Breakfast: The ‘R’ Word

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Recession - Economy - Modern Compass

An increasing number of economists are now doubting the possibility of a “soft landing,” which would see the Fed get inflation under control without triggering an economic downturn.

 

An ugly Monday is in store with traders taking note of the situation: Dow futures are down 600 points premarket, while contracts linked to the S&P 500 and Nasdaq tumbled 2.6% and 3.3%, respectively. The market is already coming off its worst week since January as consumer prices stay elevated at 40-year highs and gasoline remains firmly over $5 per gallon.

 

Quotes: “I’ve become more pessimistic about the opportunity of stabilizing inflation at an acceptable level without a recession,” said JPMorgan Chase chief economist Bruce Kasman, who also warned of a harmful wage-price spiral.

 

 

The feedback loop occurs when surging inflation triggers elevated wage demands, leading to increased costs for companies and thereby raising prices even further. “The chairman of the Fed doesn’t want to let the ‘r’ word slip out of his mouth in a positive way, that we need a recession,” added former Fed Vice Chair Alan Blinder. “But there are a lot of euphemisms and he’ll use them.”

 

While the Fed has so far telegraphed half-point hikes at its meetings in June (coming up on Wednesday) and July, there is some murmur that a larger 75 basis point increase could be on the table. Doves just don’t exist on the committee right now and many will be eyeing the Fed’s dot plot to see where interest rates are going in the coming months and years ahead. Early Monday, the 2-year Treasury rate jumped more than 16 basis points to 3.21%, briefly topping the benchmark 10-year yield to flash another recession signal (the two last inverted back in April).

 

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As mentioned previously on WSB: While rising yields have crushed treasury-related ETFs, there are ways investors can exploit a rising-rate environment. Market participants that are betting on higher yields can invest in inverse ETFs that are designed to bet against bond prices and are active again in the premarket session. Four examples and their YTD prices include the ProShares Short 20+ Year Treasury ETF (TBF+23%, ProShares UltraShort 20+ Year Treasury ETF (TBT+51%, ProShares UltraPro Short 20+ Year Treasury (TTT+82%, and the Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEARCA:TMV+82%.