Oil prices drop, and the US bond market issues a recessionary warning
On Tuesday, as recession worries engulfed international markets, oil prices fell and the bond market flashed a cautionary sign regarding the direction of the US economy.
Investor confidence has declined recently as a result of indications that rising borrowing costs, along with higher prices for everything from food to fuel, are having a negative impact on households and businesses more severely.
Tuesday saw the continuation of oil prices’ steepest declines since March as the commodities market was suddenly shaken by worries about demand. The international benchmark, Brent, fell nearly 11% to $101.31 per barrel, while the US benchmark, West Texas Intermediate, fell 9.4% to $98.25.
On Tuesday, commodities analysts at Citigroup stated that a recession was “increasingly likely.” According to that scenario, assuming Opec and its allies do not intervene in the market, the price of oil could reach $65 per barrel by the end of this year and $45 by the end of 2023.
Concerns about the condition of the largest economy in the world have been raised by a survey released late last week by the Institute for Supply Management on the US manufacturing sector that showed declines in new orders and employment in the previous month.
In light of recent economic data, an Atlanta Federal Reserve forecast predicts that the US economy will contract by 2.1% on an annualized basis in the second quarter, following a decline in the first. Two consecutive quarters of contraction are typically regarded as the start of a recession.
The yield on 10-year US government bonds plunged below that on two-year notes for the third time this year, a sign of the deteriorating long-term economic outlook. Every US recession in the previous 50 years has been preceded by so-called “inversions” of the yield curve, though not immediately but two years later.
The Bank of England governor Andrew Bailey expressed concern that “the global economic outlook has deteriorated markedly” on Tuesday, and a strike at Norwegian gas and oilfields threatened to exacerbate pressures on European inflation to the upside.
As traders flocked to the safety of the US dollar, the euro fell to its lowest point in twenty years.
The dollar continues to be the main safe haven, which is one of the things causing the [euro] movement to become more pronounced. When people are stressed or anxious, they want money, according to Jane Foley, head of FX strategy at Rabobank.
Equities prices were also under pressure, with Europe’s Stoxx 600 falling 2.1% and the US blue-chip S&P 500 falling 0.9%.
As the economic outlook worsens, investors are already lowering their expectations for Fed rate increases. The Fed is now anticipated to raise rates to 3.3% by early 2023, down from projections of 3.9% three weeks ago, according to futures markets. Following several increases this year, the benchmark interest rate set by the central bank is now in the range of 1.5% to 1.75 %.
The minutes from the Fed’s most recent monetary policy meeting, which are scheduled to be released on Wednesday, could provide additional information about how much the central bank is prepared to tighten monetary policy. A closely watched US jobs report on Friday will also show how hot the labor market is in the nation, a factor that could also affect Fed policy.
