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NEW YORK, July 8 (Reuters) – With a miserable first half for the stock market now in the history books, investors are assessing whether the US economy can avoid a significant downturn as the Federal Reserve raises rates to fight the worst inflation in decades.

The answer to that question stands to have a direct impact on markets. Strategists say an economic slump coupled with weak corporate earnings could push the S&P 500 lower by at least another 10%, compounding losses that have already pushed the benchmark index down 18% year-to-date.

Conversely, in a scenario that includes solid profit increases and moderating inflation, stocks could bounce to around where they started the year, according to some analysts’ price targets.

For now, “investors are anticipating that we are seeing a slowdown,” said Lindsey Bell, chief markets and money strategist at Ally. “The big question is how deep is this slowdown going to be?”

The case for an imminent economic downturn took a hit on Friday, after a Labor Department report showed employers hired far more workers than expected in June, giving the Fed ammunition to deliver another 75 basis-point interest rate hike this month.

“The June employment report indicates that the economy is neither on the cusp of a recession – much less already in one – nor in an overheated state,” Oxford Economics said in a note.

It predicted more market volatility “amid heightened speculation over what the Fed will do.”

More key information on the course of the economy is expected later this month, as second-quarter earnings reports flood in over the next few weeks and investors parse fresh data, including Wednesday’s closely watched consumer prices report for June.

Though the Fed has said it is confident in achieving a so-called soft landing by bringing down inflation without upsetting the economy, some investors believe this year’s steep stock declines suggest a degree of economic slowdown is already baked into asset prices.

The S&P 500, for instance, has fallen as low as 23.6% from its January record high this year, in line with the 24% median decline the index has registered in past recessions, indicating that “at least some of the challenging environment is reflected in stock prices,” Keith Lerner, co-chief investment officer at Truist Advisory Services, said in a report.

Recessions are officially called in hindsight, with the National Bureau of Economic Research declaring one when there has been a “significant decline in economic activity that is spread across the economy and lasts more than a few months.”

COMPETING SCENARIOS

Forecasts vary for how rocky the economy can get.

A note outlining various economic scenarios from UBS Global Wealth Management said the S&P 500 could fall to 3,300 – some 31% from its January high – if an economic slump leads to a steep drop in corporate earnings, as well as in the case of “stagflation,” which typically involves a cocktail of persistently high inflation combined with slow growth.

The bank’s analysts gave a 30% chance for the “slump” scenario, and pegged the chances of stagflation at 20%.

A “soft landing” scenario is their most likely outcome, however, and would include the S&P 500 finishing the year at 3,900 – right around where it closed on Friday.

Such a scenario, to which UBS assigned a 40% weighting, depends on investors believing that inflation is under control and earnings can remain resilient despite tighter financial conditions, they said.

In a recent note outlining the “increasing likelihood of a stagflationary environment,” strategists at BofA Global Research recommended investors combine areas of the stock market that would benefit from inflation, such as energy, with defensive sectors like healthcare.

Wells Fargo Investment Institute strategists, meanwhile, earlier this week called for a “moderate US recession” and lowered their year-end S&P 500 target to a range of 3,800-4,000.

Some investors hold a more optimistic view of the economy and believe stocks could head higher from current levels.

Citi’s strategists weighted a “soft landing” scenario at 55%, although they also saw a 40% chance of a mild recession and a 5% chance of a severe one. Their year-end S&P target is 4,200.

John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, this week lowered his S&P 500 price target to 4,800 from 5,330 that he had initiated in December – with the new level still 23% above where the index closed on Friday.

He expects consumer demand, business investment, and government spending to support growth.

“It’s a resilient economy,” Stoltzfus said.

(Reporting by Lewis Krauskopf in New York; Editing by Ira Iosebashvili and Matthew Lewis)

July 8 (Reuters) – Global ratings agency Fitch on Friday raised United States’ outlook to “stable” from “negative” on improved near-term government debt dynamics, driven by a stronger-than-expected post-pandemic economic recovery.

The agency said it expects government revenue to grow this year, helped by strong personal and corporate income taxes.

Fitch maintained its sovereign rating at ‘AAA’ on structural strengths such as the size of the economy, high per capita income, and a dynamic business environment.

Last month, Moody’s also affirmed its highest sovereign rating of “Aaa” for the country. The ratings agency said it expects the economy to remain resilient to current challenges from high inflation and Russia’s invasion of Ukraine.

The US economy has been on recession watch as the Federal Reserve aggressively tightens monetary policy to tackle inflation.

The US central bank last month raised its policy rate by three-quarters of a percentage point, its biggest hike since 1994.

(Reporting by Bhanvi Satija in Bengaluru; Editing by Devika Syamnath)

 

NEW YORK, July 8 (Reuters) – A better-than-expected US jobs report eased some worries about an imminent recession but also bolstered the case for the Federal Reserve to continue aggressively hiking rates, threatening more turbulence for asset prices this year.

Hopes that a weakening economy could push the Fed to slow or stop its rate hikes earlier than previously expected have bolstered stocks and bonds in recent days. The S&P 500 rebounded 6% from its June lows while the 10-year US Treasury yield, which moves inversely to prices, hit a low of 2.75% this week.

That view took a hit on Friday, as traders bet on bigger Fed rate hikes after the report, which showed US employers hiring far more workers than expected in June. Rate futures contracts now reflect a base-case view that the Fed’s policy rate will be in the 3.5%-3.75% range by year end, higher than Fed policymakers themselves predicted three weeks ago.

To some investors, that means the volatility that has rocked markets in the first half of the year should continue as uncertainty over how restrictive Fed policy will need to be threatens risk appetite across Wall Street.

“We don’t know if inflation peaked, we don’t know if Fed hawkishness has peaked,” said Phil Orlando, chief equity market strategist at Federated Hermes. “The combination of uncertainty about inflation, Fed policy and earnings trends suggest that stocks should go lower.”

Immediate reaction to the report was muted in stocks, with the S&P 500 recently down 0.1%. Treasury yields shot higher, with the 10-year recently at nearly 3.1%.

Investors now turn to the monthly US consumer price index report for a gauge on inflation, due next week, as well as to the start of a second-quarter earnings season that investors fear will come in weaker than forecast.

Stocks and bonds reeled last month after data showed inflation running at its hottest pace in more than four decades, prompting a 75-basis-point interest rate increase by the Fed, its biggest hike since 1994.

“June’s US Employment Report lends support to our forecast that the Federal Reserve will raise interest rates by more than is currently discounted in markets, pushing up Treasury yields this year,” analysts at Capital Economics wrote.

“Although we think a US recession will be avoided, we still expect US equities to be weighed down by both rising discount rates and disappointing growth in corporate earnings.”

Meanwhile, OANDA’s Edward Moya wrote that “Wall Street should get used to a choppy stock market for the rest of the summer as the Fed tries to navigate a soft landing.”

Friday’s report found that nonfarm payrolls increased by 372,000 jobs last month, while economists polled by Reuters had forecast 268,000 jobs were added last month. The unemployment rate was unchanged at 3.6% for a fourth straight month.

Other recent numbers have been more ominous, however, and some investors believe it’s only a matter of time before the Fed’s rate hikes are broadly reflected in economic data.

Data on Thursday showed the number of Americans filing new claims for unemployment benefits unexpectedly rose last week, while another report last week showed US manufacturing activity slowed more than expected in June.

“Jobs reports are lagging economic indicators that are often strong entering a downturn,” said Richard Flynn, managing director at Charles Schwab in the UK. “Despite today’s good news, stocks are likely to continue to feel the weight of monetary tightening, shrinking liquidity, and slower economic growth.”

(Reporting by Lewis Krauskopf, Sinéad Carew and Herbert Lash in New York and Sujata Rao in London; Editing by Ira Iosebashvili and David Gregorio)

LONDON, July 7 (Reuters) – Oil prices were steady on Thursday after steep losses in the previous two sessions, as investors returned their focus to tight supply even as fears of a global recession persisted.

Brent crude futures rose 14 cents, or 0.1%, to $100.83 a barrel by 0900 GMT. WTI crude futures climbed 21 cents, or 0.2%, to $98.74 a barrel.

Prices swung between about $2 in losses and gains of nearly $1 in volatile trade.

“Recession fears continue to grow and that obviously does raise some concerns for the demand outlook,” said Warren Patterson, ING’s head of commodity research.

“However, supportive fundamentals should mean that further downside is relatively limited.”

He added that it’s hard to be overly bearish on oil prices as the Brent monthly spreads remain in wide backwardation, referring to prompt-month prices trading higher than those for future months.

“Recent Iranian nuclear talks don’t appear to have achieved much”, Patterson added, after Washington tightened sanctions on Iran on Wednesday, pressuring Tehran as it seeks to revive the 2015 Iran nuclear deal.

In recent weeks oil prices have slid, fanning fears of a sharp economic slowdown and a hit to demand for commodities.

Brent and WTI closed on Wednesday at their lowest since April 11. The declines follow a dramatic fall on Tuesday when WTI slid 8% while Brent tumbled 9% – a $10.73 drop that was the third biggest for the contract since it started trading in 1988.

“If the forecasted recession is not severe, the crude price should remain in the $100/bbl range for the next 2-3 years,” said Fereidun Fesharaki of consultancy FGE.

Traders are watching for possible oil supply disruptions at the Caspian Pipeline Consortium (CPC), which has been told by a Russian court to suspend activity for 30 days. Exports at CPC, which handles about 1% of global oil supplies, were still flowing as of Wednesday morning.

(Additional reporting by Florence Tan in Singapore and Stephanie Kelly in New York; Editing by Kim Coghill and Jason Neely)