💣Recession fear is mounting🔫

Thursday saw another fall for equity markets, with technology stocks taking the plunge. The Fed has successfully communicated its aggressive stance in the fight against inflation. 

The pain is that most Fed members see the rate climbing above 4.5% in 2023, higher than the prior estimate. We are now witnessing the 2-year Treasury yield, often seen as an indicator of the fed-funds rate in the future, climbing to 4.12%. 

Moreover, we still see an inverted yield curve between the 2-year and 10-year bonds. The US also feels the heat from global central banks that increase their interest rate. 

💰How does overseas rate hikes affect US bond yield and the stock market?🗽

This has been a question by Pika World friends. So let us dive into some details. 

First, the US bond market is less attractive when foreign bond yields increase. So, logically, money will flow out of the US bonds, lowering the price of US bonds and lifting their yield. 

The higher yield will then keep the dollar elevated since investors have to buy dollars to buy US bonds. When overseas rate hikes happen, it tends to push US yields higher and pressure the equity market. 

🎁Is interest rate the only scare?💸

Pika World thinks that the main fear lies in corporate earnings. The economic ramification of a steeper rate coupled with a firmer dollar will likely hit earnings from current expectations. 

We are seeing forecasts falling in most sectors, and more could be on the horizon. Investors could also brace for another downward earnings revision as it takes time for consumers to cut back on their spending, given the rate increases. After all, monetary policy wings have a long lag effect on the real economy. 

Our positions on small caps continue to be hammered, and Pika World remains defensive while bracing through the snowy winter chill season. 

📮What’s on the menu today?🔑

At 9.45 pm, we will receive the Manufacturing PMI. It is expected to see minor moderation to 51.1 from 51.5 in the prior period. 

Service PMI will also be delivered at the same time. We expect a slight improvement to 45.0 from 43.7. 

Uncle Powell will speak at 2 am, and it might give some catalysts movement to the market.