Another 27% drop in the S&P 500 could come if inflation hawks are right, team at Goldman Sachs warns – MarketWatch | Jewelry Dukan

Not exactly TGIF this Friday.

What the sell-side is beginning to realize is not only that the Fed will be aggressive in September after the recent shocking inflation numbers, but that the central bank needs to keep rates higher and longer. The British Pound GBPUSD,
in some ways an indicator of financial market conditions, fell to its lowest level since 1985 against the US dollar on Friday, hovering below $1.14.

In a new note to clients, Goldman Sachs chief economist Dominic Wilson and global markets strategist Vickie Chang have summarized the numbers on what it would mean if the Fed had to take a more aggressive stance than the market is forecasting .

The results aren’t great. If the Fed has to hit the economy hard enough to lift the unemployment rate to 5%, the S&P 500 SPX,
should fall 14% below 3,400, the yield of the 5-year TMUBMUSD05Y note,
would need to rise 91 basis points and the trade-weighted dollar would rise 4%.

In the more severe scenario, where the unemployment rate had to hit 6%, the S&P 500 would fall 27% to below 2,900, the 5-year Treasury yield would rise 182 basis points and the dollar would rise 8%.

(The Fed’s latest dot chart itself shows that the unemployment rate will rise to 4.1% by 2024, and Goldman’s house forecast puts the unemployment rate at 4% by the end of 2024.)

The new Goldman forecasts aren’t great, but they’re in line with past drawdowns.

This severe scenario implies a tightening of financial conditions comparable to the global financial crisis of 2008 and before that the recessions of the early 1980s.

“If only a severe recession — and a tougher Fed response to achieve it — will tame inflation, then it’s likely that the downside for both equities and Treasuries could still be significant, even after the damage, we’ve already seen,” he told the strategists.

Incidentally, Goldman went into the new year forecasting that the S&P 500 would close 2022 at 5,100.

The market

US stock futures ES00,

indicated a slow start. the dollar DXY,
seen new power. Crude Oil Futures CL.1,
traded around $85.

The Buzz

FedEx FDX,
Shares tumbled 20% in premarket trading after issuing a warning in the fiscal first quarter and withdrawing guidance for the rest of the year. competitors UPS UPS,
and Deutsche Post DPW,
also fell.

General Electric GE,
CFO Carolina Happe told an investor conference that she sees continued pressure in the supply chain that will impact free cash flow in the third quarter.

About UBER,
said it was responding to a cybersecurity incident and had contacted law enforcement.

said it would split into two companies rather than sell itself.

Germany seized the assets of three Russian-owned oil refineries, accounting for 12% of the country’s oil refining capacity.

The only data available is the University of Michigan Consumer Sentiment Index, due at 10:00 am EST, with the report’s inflation expectations to watch closely.

The White House released a spate of reports on digital assets as it issued financial stability warnings ahead of cryptocurrencies.

The best of the web

The Fed has made its latest purchase of mortgage-backed securities.

America’s lowest-income households are poorer than 14 European countries, including Slovenia.

Apple AAPL,
is becoming a different kind of company.

The graphic

There’s good news and bad news with this chart compiled by Bank of America showing credit card usage rising sharply in both the US and UK. The bad news, of course, is that Americans and Brits feel the need to go into debt to support household spending as inflation rises. However, the good news is that they are still spending money.

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