Concerns about stagflation have been constant, with recent data showing a marked slowdown in economic growth and an acceleration in inflation.
From now on, Wall Street cannot ignore this unpleasant subject because its presence is starting to be felt on the financial markets, particularly on bonds.
“I think what we’re seeing here is I’m starting to feel some whiffs of, dare I say, stagflation,” Steve Sosnick, chief strategist at Interactive Brokers, told Bloomberg TV on Friday. “I know it’s a bad word in many circles.”
He called the first-quarter GDP report terrible on Thursday, noting that growth decelerated much more than expected, from 3.4% in the fourth quarter to 1.6%.
Meanwhile, the report also showed that inflation, as measured by the personal consumption expenditure index, accelerated to 3.4% from 1.8% in the previous quarter.
“Well, if you have a weak economy and inflation that’s not coming down, you kind of have to think in those terms,” Sosnick added. “And that’s why it’s been quite shocking to see bond yields rise at a time when GDP has been a big failure. So it has to be this other inflationary nervousness.
Analysts called the latest batch of data the “worst of both worlds” because inflation that remains stubbornly above the Federal Reserve’s 2% target will prevent it from cutting rates, which it has always done in response to slowing economic growth.
Expectations that the Fed will be forced to continue its restrictive monetary policy for longer have pushed the 10-year Treasury yield back to 4.7% in recent days before retreating, even as markets fear an eventual return to 5 % is possible.
The resurgence in bond yields, which affects other borrowing costs like mortgage rates, has also hit stocks, particularly growth-oriented tech giants like Nvidia.
Investors should feel “a little worried,” Sosnick warned, saying the time to buy anything amid a broad market rally is over.
“The tensions between stocks and bonds are getting a little scary,” he added.
Markets shrugged off this early-year dynamic as stocks’ relentless rise was driven by “fear of missing out,” while rising bond yields had been attributed to a strong economy, which may help stocks – to a certain extent, he explained.
But with growth slowing and inflation picking up, the bond market is starting to come under stress. And with a Fed meeting and monthly jobs reports expected next week, the downside risk for stocks remains significant, Sosnick warned, noting that the market has fallen 4% to 5% but has not completed a correction, which is generally considered a correction. a drop of 10%.
Others on Wall Street have also expressed concern over data that points toward a stagflation scenario.
On Tuesday, JPMorgan CEO Jamie Dimon said the economy more than ever resembled the 1970s, when inflation and unemployment were high but economic growth was weak.
He also suggested that some indicators could be worse in 2024 than they were in 1970: “If you go back to the 1970s, deficits were half of what they are today, the debt/debt ratio GDP was 35%, not 100%. and I think part of the reason we’ve had this strong growth is because of fiscal spending.
Also this week, Mark Haefele, head of investments in UBS’s global wealth management, told MarketWatch that he’s not worried about a single data point, “no one is really prepared” for the stagflation.
