New York
CNN
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The market is bracing for an ideal storm of bad news. The newest fear? The impending debt ceiling drama in Washington.
The United States hit its borrowing cap on Thursday, forcing the Treasury Department to begin taking “extraordinary measures” to maintain the authorities open.
If an settlement isn’t reached, markets could plunge (like they did the final time this occurred in 2011) and the United States dangers having its credit rating downgraded once more.
“From each an financial and a monetary perspective, a failure to lift the debt ceiling could be an unmitigated catastrophe,” stated David Kelly, chief international strategist with JPMorgan Funds, in a report earlier this week.
Kelly added that “a failure to extend the debt ceiling is the most speedy fiscal menace to the economy and markets in 2023” and {that a} deal is wanted sooner somewhat than later with a view to reassure the markets.
“Financial chaos would, presumably, ultimately result in some compromise in Washington. However, this won’t happen quickly sufficient to stop a recession and will go away some lasting scars, together with a everlasting improve in the price of funding U.S. federal debt,” Kelly stated.
That could be catastrophic news for the economy. And buyers are not shrugging off adverse headlines.
There’s a saying on Wall Street that bad news for the economy is really good news for the inventory market and vice versa. That’s as a result of buyers typically guess that dismal headlines will ultimately immediate the Federal Reserve and different central banks to chop rates of interest and supply extra stimulus that may assist increase company income…and inventory costs.
But Wednesday’s big market sell-off and the continued slide Thursday may characterize a turning level for market sentiment. The Dow was down about 250 factors, or 0.7%, in late morning buying and selling, and it has now given up its positive factors for the 12 months. The S&P 500 fell 0.9% whereas the Nasdaq slid by greater than 1%.
After a promising begin to the 12 months, shares have seemingly taken a flip for the worse. Bad news really is perhaps bad news.
“We’ve been snuggled up in expectations of a comfortable touchdown for the US economy,” stated Kit Juckes, chief international overseas alternate strategist at Societe Generale, in a report Thursday. “Take away the blanket and it feels chilly.”
Yes, the Fed is now more likely to increase charges by “solely” 1 / 4 of a proportion level when its two-day assembly wraps up on February 1 as inflation pressures abate.
Still, the promise of smaller fee hikes and the chance of a Fed pause later this 12 months is not sufficient to counteract the rising proof that the US economy could also be in for a tough patch.
Retail sales fell greater than anticipated in December. Industrial manufacturing unexpectedly slid final month too, an indication of weak spot in the manufacturing sector.
“A clutch of financial knowledge releases…point out that the economy is lastly slowing extra broadly, and that the all-important shopper is turning into more and more cautious about spending,” stated Quincy Krosby, chief international strategist for LPL Financial, in a report.
“What just a few weeks in the past would have seen markets cheering the weaker knowledge…is now being judged extra harshly with bad news not having fun with a heat welcome,” she added.
Earnings from big banks have been blended. Surging mortgage rates have already dented demand for housing. And a number of financial institution CEOs have warned that a recession may lie ahead.
Market strategists at Evercore ISI declared in a report Wednesday that “the market’s New Year rally has concluded,” and that latest knowledge reinforces a base case of a recession starting in the second half of this 12 months.
