What You Need to Know

Stock futures dipped in early morning trading on Wednesday amid soaring inflation and the Fed’s aggressive monetary policy to tame it, threatening to constrict economic growth in the process.

Futures on the Dow Jones Industrial Average (DJIA) receded 1.49%, while those on the S&P 500 (SPX) dipped 1.74%, as of 5:04 a.m. EST, Wednesday. Meanwhile, the Nasdaq 100 (NDX) futures retracted by 1.96%.

The downward movement came after the market experienced a fresh bout of optimism in regular trading hours on Tuesday after weeks of selling. The Dow ended 2.15% higher on Tuesday, while the S&P 500 and the Nasdaq 100 closed 2.45% and 2.49% higher. However, it is not yet clear whether this optimism is just a brief loosening of the bear’s grip, or the start of a sustainable rally.

Recently, fears that the economy is slipping into a recession have been rife, especially after May’s inflation reached its highest in 40 years, prompting the Fed to take its hawkishness up a notch with a 75 basis point interest rate lift. This has affected investor sentiment and weighed on stocks.

Meanwhile, U.S. home prices continued to climb in May. The median value crossed $400,000 the first time ever, even as house sales dropped due to higher mortgage costs.

What Experts are Saying

Financial Services firm UBS gave some hope, saying that even if the economy tips into a recession, it is more likely to be a “shallow one given the strength of consumer and bank balance sheets.”

However, Goldman Sachs seems to be more skeptical in this regard, saying that the possibility of a recession has gone significantly up. The firm believes that even though economic activity is showing signs of slowing down, the Fed is likely to keep tightening its monetary policy in case energy prices rise further.

The chances of energy prices upholding the upward momentum are also high at least as long as the Russia-Ukraine war continues and nations do not come to a trade settlement. Therefore, Goldman Sachs’ estimate regarding the Fed’s actions is a major source of worry.

Meanwhile, Oppenheimer expects markets to remain volatile “until the actions taken by the Federal Reserve thus far…and the actions it takes going forward have had time to work through the system.”

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