By Yasin Ebrahim
Investing.com -- The Dow closed below a key milestone Thursday, and slipped below a more than one-year low as the post-Fed surge quickly faded on worries that avoiding a recession is likely out of the reach.
Investors appear to be bracing for growing possibility of a recession on concerns the Fed to turn even more hawkish because inflation will remain elevated for longer than the central bank currently expects.
“Bottom line is the Fed still believes core inflation is largely temporary,” Morgan Stanley said, pointing to the Fed’s forecast for core inflation to peak at 4.3% this year, and eventually drop to under 3% next year.
But with inflation currently running at 8.6% and expected by traders of “fixings,” or derivative-like instruments to remain above 8% for the year, the Fed may be forced to hike rates to a terminal rate, or peak of 4.5% to 5%, more than the central bank’s current forecast of 3.5% to 4%.
Despite the slip in Treasury yields post-Fed decision, Morgan Stanley said it believes that yield curve will soon resume flattening and invert – a key recession warning - as the markets “move toward a higher terminal rate.”
Tech and consumer discretionary, the growth areas of the market, gave back their gains from a day earlier, with the latter led by a slump in consumer stocks on worries about a Fed-induced slowdown pushing the economy into recession.
Royal Caribbean Cruises (NYSE: RCL ), Norwegian Cruise Line (NYSE: NCLH ), Carnival Corporation (NYSE: CCL ) were among the biggest decliners, while Tesla (NASDAQ: TSLA ) slumped 10% to pile on the pressure in the sector.
KLA-Tencor Corporation (NASDAQ: KLAC ) gave up earlier gains to add more pressure on chip stocks even as it reiterated its guidance for the current quarter, and announced a new $6 billion stock buyback program.
Economic data on Wednesday exacerbated fears of the slowdown. The housing market continue to run out of steam as data showed housing starts, measure of U.S. homebuilding, fell to a 13-month low as mortgage rates climbed.
With the Fed’s balance reduction plan underway, which “includes [selling] mortgage-backed securities,” […] housing remains the proverbial canary in the coal mine; its song is getting softer,” Yelena Maleyev, an economist at Grant Thornton, said in a note.
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