US Economy Hard Landing Signal .. Fed Warns of "Liquidity Vicious Cycle" (Comprehensive)

S&P 500 Falls Below 4000 After One Year
Nasdaq Drops 4.3%... Crash Market Repeats
Earnings Season Shows Increased Mentions of "Weak Demand"
Store Visitor Numbers Also Down 11%
Fed Report Warns of "Liquidity Squeeze Risk"
Yellen Says "Global Growth Imbalance"
Wall Street: "Limited Upside, Bottom Still Far"

[Asia Economy reporters Byunghee Park and Hyunjin Jung] The U.S. New York stock market plunged again on the 9th (local time), returning to levels seen a year ago. Concerns are growing that the Federal Reserve's (Fed) shift to monetary tightening, combined with China's COVID-19 lockdown policies and Russia's invasion of Ukraine, could trigger a global economic recession. Meanwhile, warnings are also emerging that the U.S. economy could experience a hard landing.

On this day, the Dow Jones Industrial Average closed at 32,245.70, down 1.99% from the previous session. The S&P 500 index fell 3.20% to 3,991.24, and the tech-heavy Nasdaq index plunged 4.29% to 11,623.25. The S&P 500 falling below the 4,000 mark is the first time in over a year since March 31, last year.

The current stock price decline is due to investors selling stocks consecutively as the Fed's 'big step'?that is, several 0.5 percentage point interest rate hikes following May?was anticipated amid high inflation. On this day, the 10-year U.S. Treasury yield surpassed 3.2%, the highest since November 2018.

Signs of a Hard Landing for the U.S. Economy

Market participants do not trust Fed Chair Jerome Powell's statement that "the U.S. economy can avoid a recession and achieve a soft landing."

In fact, signals indicating the risk of a hard landing for the U.S. economy are being detected one after another in the real economy. On this day, Bloomberg cited an analysis by Bank of America (BOA), reporting that the number of times companies mentioned weak demand during the earnings season was the highest since the second quarter of 2020, right after the COVID-19 pandemic outbreak.

Bloomberg also reported that the number of store visitors at the end of last month decreased by nearly 11% compared to a year ago. The decline in visitors is because consumers are reluctant to purchase due to product price increases.

The contraction in the real economy is leading to financial market instability. The Fed released its semiannual Financial Stability Report on this day, warning of liquidity tightening risks by stating, "Although recent financial market liquidity is not at an extreme level as seen in some past cases, the risk of sudden and significant deterioration is higher than usual."

Since the beginning of this year, most financial markets including government bonds, commodities, and securities have shown high volatility due to U.S. monetary policy tightening, Russia's airstrikes in Ukraine, and concerns over China's economic slowdown. The Fed also assessed that "increasing uncertainty and volatility can lead to a vicious cycle of liquidity deterioration, which in turn can cause even greater price volatility."

The Fed noted that consumer finance could be hit by unemployment, high interest rates, and falling housing prices, while corporate finance might face rising delinquency rates and bankruptcies. It added, "Rapid interest rate hikes can increase volatility, pressure market liquidity, and cause significant price adjustments in asset markets, potentially resulting in losses for financial institutions."

U.S. Treasury Secretary Janet Yellen, in written materials released ahead of the Senate Banking Committee hearing scheduled for the next day, forecasted that "as countries continue to struggle with the pandemic, volatility and imbalances in global growth rates are likely to persist."

Wall Street: "Not the Bottom Yet"

Wall Street experts warn of further declines, saying the bottom has not yet been confirmed.

Manish Deshpande, Head of U.S. Equity Strategy at Barclays, told CNBC, "We expect the market to continue to maintain volatility," adding, "The risk is tilted downward as the risk of stagflation (high inflation and low growth) continues to increase." He added, "While a sharp rally in a bear market is not ruled out, the upside is limited."

Jeff Kilburg of Sanctuary Wealth said that a significant price re-adjustment triggered by the Fed is underway, and the only way to find a bottom in stocks in the short term depends on whether the Fed has tools to stabilize (bond) yields, arguing that the 10-year yield must return below 3%. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) rose 4.56 points (15.10%) from the previous session to 34.75.

This content was produced with the assistance of AI translation services.