Snap update rekindles US recession fears

US recession jitters were rekindled by an update from Snap Inc, which blamed a challenging macroeconomic environment for its woes.

JP Morgan analysts say a slowdown seems clear, but it is “an unsettled question whether the US is headed for a mid-cycle slowdown or recession”. Picture: Bloomberg

US recession jitters after recent warnings from large US retailers were rekindled by an update from Snap Inc, even if it was a bit opportunistic of the owner of Snapchat to blame a challenging macroeconomic environment for its woes.

Snap shares dived 31 per cent in after hours trading, Meta lost 7.1 per cent and Alphabet shares fell 3.7 per cent, driving S&P 500 futures down 1.2 per cent and Nasdaq futures down 1.8 per cent.

It was an ugly set up for Wall Street after the S&P 500 narrowly avoided closing in “bear market” territory on Friday. A subsequent short-covering rally potentially seemed to have run its course, with the market soon moving on from a surge in JP Morgan shares after a positive investor update.

Once the S&P 500 closes down at least 20 per cent from a peak – at 3837 points – the median fall in the index from the peak to the bear market low has been 33.2 per cent since 1929.

In the past 92 years, the median number of trading days from entering a bear market to reaching the low has been 52, according to Dow Jones Market Data.

But much depends on whether it’s a “gummy” or “grizzly” bear market, and that depends to a large extent on whether the US faces a recession.

On that point, JP Morgan strategists note a “disconnect in recession pricing from markets and economic indicators”. A slowdown seems clear, but it remains “an unsettled question whether the US is headed for a mid-cycle slowdown or recession”, they said.

“Markets are increasingly pricing the latter, implying a much higher recession probability than economic data,” said JPM strategists led by Marko Kolanovic.

They saw “great opportunities in energy, small caps, high beta/cyclicals and emerging markets”, as many of these segments trade at record valuation discounts.

“Even for the broad market, levels may be close to bottoming given positioning, flows and sentiment, with month-end rebalances providing support over the next week and buyback executions running at 3-4 times higher than trend,” they said.

But Citi’s chief US economist, Andrew Hollenhorst, said US hard landings were the “historical norm” when the Fed sought to damp strong demand and bring down inflation.

While the tailwinds from nominal income growth and demand momentum make a 2022 recession unlikely in his view, the “probability rises rapidly in 2023 and beyond” as Fed officials sought to cool down an overheating economy by tightening financial conditions through lower equity prices and higher real interest rates.

“Importantly, (Fed) chair Powell began to socialise the idea in an interview this week that the unemployment rate may need to rise for inflation to fall,” he said.

RBC chief US economist Tom Porcelli said there had been calls for the Fed to hike by 75 or even 100 basis points at the June meeting since the news from the retailers last week drove home the fact that prices were too high and this was hurting the consumer.

But while high inflation was no doubt hurting the US consumer and business, the idea of the Fed getting aggressive now was “missing the mark on so many levels – not the least of which is that monetary policy works with long and variable lags”,

The market has priced in another 50 basis point hike by the Fed on June 15.

But Mr Porcelli said the US rate hiking cycle might “be closer to the end than appreciated” which also meant the easing cycle might be much closer than was appreciated.

Still, BlackRock Investment Institute cut its view on developed markets equities to neutral, citing “a risk of the Fed talking itself into overtightening policy and China adding to a weaker global outlook”.

“The Federal Reserve signalled its focus is on taming inflation without flagging the big economic costs this will entail,” said BII strategists led by Jean Bolvin. “As long as this is the case and markets believe it, we don’t see the basis for a sustained rebound in risk assets.

“We think the Fed will consider the costs to growth at some point, especially if inflation cools, and expect a dovish pivot later this year. China’s slowdown is a large shock that will be felt over time.”

The latter prediction came as China’s CSI 300 index dived 2.3 per cent on Tuesday.

China’s sharemarket ignored the nation’s “33-point package” of fiscal stimulus measures to support businesses and stimulate demand and offset the damage from Covid lockdowns.

Closer to home, Barrenjoey said it was “too early” to buy the local retail sector as “top line and earnings pressure isn’t fully reflected in earnings expectations”.

“We have noticed a different tone from retailers and suppliers we’ve spoken with over the past week,” said Barrenjoey’s consumer sector analysts led by Tom Kierath.

“Until now trading feedback had been overwhelmingly positive with consumers still spending and limited down trading, but as cost-of-living pressures – and the federal election – came into focus trading slowed. The consumer environment could be about to get more difficult.”

Originally published as Snap update rekindles US recession fears