US stocks reversed course yesterday and the Dow Jones Index fell over 600 points. While the December wholesale inflation data was lower than expected, markets are now concerned about a looming recession in the US.

US wholesale price index fell 0.5% in December which was steeper than the 0.1% fall that analysts expected. The fall is the largest since April 2020 when lockdowns took a toll on global economic activity.

On an annualized basis, the PPI (producer price index) rose 6.2% as compared to 7.1% in the previous month. The price rise is the lowest since March 2021.

Notably, CPI (consumer price inflation) has also fallen gradually after peaking at 9.1% in June. In December, annualized CPI came in at 6.5% while prices fell 0.1% on a monthly basis.

While markets should ideally have cheered the fall in inflation as it would lead to a dovish Fed, investors see falling inflation as yet another indicator of an impending recession.

The Fed front-loaded its rate hikes last year and after starting with a 25-basis point rate hike in March, it soon graduated to 75-basis point rate hikes.

However, in December, the US central bank raised rates by 50 basis points which was in line with expectations. While US inflation towards the end of the last year, economic growth also slowed down, which prompted the Fed to slow down the pace of rate hikes.

Recession Fears Spook Markets after Soft Retail Sales

US retail sales fell 1.1% in December which was wider than the 1% that analysts were expecting. To be sure, companies ranging from Amazon, Walmart, and Peloton had anyways warned of tepid holiday spending in 2022.

Amazon fell almost 50% last year and also lost its position as a trillion-dollar company. Many brokerages have meanwhile listed it as a top idea for 2023. There is a guide on buying Amazon stock.

The fall in retail sales was widespread and barring building material, grocery, and sporting and hobby goods, all other categories witnessed a slowdown. Sales of discretionary products took a backseat as consumers had less money to spend due to spiraling inflation.

Commenting on the retail sales data, Ian Shepherdson, chief economist at Pantheon Economics said, “We expect this softening trend to continue, especially if the looming slowdown in job gains makes people less willing to draw down savings accumulated during Covid.”

High inflation and the resultant rate hikes have compounded recession fears. However, some investment strategies can outperform during high inflation.

World Bank and IMF are Worried about a Recession

Major US banks including Bank of America, JPMorgan Chase, and Wells Fargo see a mild recession as their base case scenario for 2023.

The World Bank has slashed its 2023 global GDP growth forecast to a mere 1.7% which is way below its previous projection of 3% growth. It also fears a recession this year amid slowing global growth.

If the World Bank’s projections turn out to be true, it would be the third worst global growth in almost three decades. The global economy fared poorly only during the Global Financial Crisis and the 2020 COVID-19 pandemic.

Meanwhile, the World Bank is not the only agency worried about a recession, even the IMF predicted that a third of the world would be in a recession this year. IMF’s head Kristalina Georgieva said, “Even countries that are not in recession, it would feel like recession for hundreds of millions of people.”

US stocks along with most other risk assets tumbled in 2022 amid the deteriorating macro environment. Fed’s rate hikes, recession fears, and the fallout of FTX bankruptcy have also taken a toll on digital assets. We have a guide on whether crypto is recession-proof.

Would Central Banks Take a Dovish Stance amid the Economic Slowdown?

The World Bank blamed the global monetary policy tightening for the slowing growth. Last year, the Fed raised rates to 4.25-4.50%, a multi-year high. The December dot plot calls for another 75-basis point rate hike in 2023.

At the press conference following the December FOMC meeting, Fed chair Jerome Powell said, “We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

Many economists believe that given the looming recession, the Fed might soon pivot to rate cuts. We’ll hear from the Fed on February 1 when the US central bank concludes its first meeting of 2023.

Meanwhile, Klaas Knot, a member of the European Central Bank said that the ECB would not stop after a 50-basis point rate hike in February.

Amid rising recession fears, the Fed might also take a dovish approach. That said, markets misjudged the Fed’s resolve to fight inflation in 2022. While US inflation has come down considerably, it is nowhere near the 2% that the Fed targets. Many economists believe that the Fed cannot win the fight against inflation without causing a recession.

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