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Recession or Not? That is the Question

The speed at which the economy has nose-dived from optimism to pessimism has taken a lot of people by surprise. That's the impact the Federal Reserve can have on the markets. Consumer confidence is fickle so when the daily news is filled with fears of recession and declining markets it impacts people in a way that causes people to spend less: The Nasdaq is down over 31% from it's highs and this along with all the media headlines of "recession" is generating a more fearful and less optimistic mood.

SNAP just anounced a significant revision in its profit forecasts due to macro economic conditions. Advertising revenue is down.

The mood on the street is somber and consumers are concerned. The critical question is what impact will this decline in consumer confidence and demand have on inflation? Will inflation numbers trend down? If they do, the current economic news may provide sufficient impetus for the Federal Reserve that they need to walk and talk a softer line and send some easening signals, such as for example, that rate increases may be sufficient.

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A Federal Reserve in Reverse. How Far Will It Need to Go?

The markets were riveted on one man on Wednesday as 2.30pm EDT rolled around. Chairman of the Fenderal Reserve, Jerome Powell was to provide a state of the market or more to the point "a state of inflation" update. A 0.5% increase in interest rates was already baked in. The unknown was whether the tone of the Federal Reserve Chairman was going to be increasingly hawkish or more in line with market expectations.

As we have said in previous blog articles, the goal of the Federal Reserve is to curb spending and bring inflation back down into its 2% per annum goal. The Federal Reserve is well aware that acting too hawkishly could send the economy into a recession and not acting agggresively enough could let inflation run amock. They are are having to walk an intricate balancing act to send the message that they will take aggressive action while at the same time keep an eye on the health of the economy.

In summary, Powell communicated exactly that on wednesday and that their primary intent is to dampen demand to bring inflation down while at the same time allowing the economy enough bandwidth to keep growing. At this juncture, the Fed projects a target of 2.4 percent by year's end. The markets responded by continuing to sell-off as they try to digest the impact of rising rates on the economy. A more pessimistic outlook will need to be swayed by market forces that point to "more light" at the end of the tunnel.

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Technical Analysis - Volume Metrics

We have covered a number of technical analysis indicators in our blog articles. Today, we are going to look at a volume indicator that measures the quantity of buy orders or volume versus the quantity of sell orders or volume.

One such indicator is "On Balance Volume" which as it's title suggests is measuring a running total of buy and sell volume that translates into a trend line that is moving up or down and can be used to correlate or measure against price. It can also be used to spot trends in price as well as price reversals.

For example, if price is moving up but the "on-balance-volume" is trending down - meaning their is more selling volume than buying volume - this may indicate a potential "price" reversal. The same is true in reverse. If "price" is moving down but the "on balance volume" indcator is trending up this can indicate a potential reversal in price.

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Navigating The Rising Tide of Interest Rate Hikes

The Fed is Waking Up and Is putting its foot on the brakes!

“Hindsight says we should have moved earlier. . . . But there really is no precedent for this.”  Fed Chair Powell, March 3, 2022

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Fear of Recession and The Yield Curve

The Yield Curve inverting has been the most accurate predictor of the economy tipping into a recession for the last 50 years. Typically, it takes about 6 months from the time the Yield Curve inverts for a recession to kick in. So, what exactly does an "inversion of the yield curve" mean? An inversion of the yield curve is looking at and referring to the differences in interest rates being charged by banks over a 2 and 10 year lending horizon. Economists also look at the 3 and 10 year lending rates as well.

Typically banks will charge a lower interest for a short term loan than for a longer term loan. Banks are incentivized to lend out at higher interest rates over a longer term loan period. However, when the 10 year interest lending rate is less than the 2 year lending rate, banks have less incentive to lend. This is known as the "yield curve inversion" when the longer term 10 year lending rate is less than than the 2-year rate. It does not happen often but when it does, it has been a good predictor of an upcoming recession for over 50 years. 

The spread between 10-year and 2-year Treasuries has fallen from 0.89% in early January to just 0.18% on March 21. So while we are close, we are not there yet.

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Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
info@hawleyadvisors.com

 

 

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