Despite the polarization of the stock market, the US economy still experienced impressive growth after a brief slowdown last year. The GDP growth rate of the United States in the third quarter is expected to exceed 5%, and the US economy has added more than 2 million jobs since the beginning of this year.
But a report released by market research firm Ned Davis Research on Tuesday showed three hidden risks that could "disrupt" the stock market and economy, and end the current growth cycle. The details are as follows:
1. Inflation is rising again
After reaching a peak of about 9% in June last year, inflation has made progress towards the Fed's long-term target of 2%, but any recovery from price increases will threaten the trajectory of the Fed's current tightening cycle.
Joseph Kalish, Chief Global Macro Strategist at NDR, said, "Breakthroughs in inflation expectations typically lead to an increase in term premiums, which further puts upward pressure on nominal returns
Kalish is monitoring US 5-year and 10-year inflation swaps that help measure inflation expectations. He is concerned that the five-year inflation swap is only a few basis points lower than its peak in 2022. If there is a breakthrough, it will raise concerns that inflation may rise.
2. The yield of 10-year US treasury bond bond exceeds 5.25%
Since the beginning of this year, the yield of 10-year US treasury bond bonds has soared, reaching a 16 year high of 5.02% on Monday. If the US bond yield further soars, it will cause trouble for the broader economy, especially if it exceeds the 5.25% level.
The yield level of 5.25% is an important 'double peak' in 2006/2007, and also represents the peak of policy interest rates during the tightening cycle. Therefore, we will not easily give up this level, "Kalish said.
Higher interest rates raise borrowing rates for consumers and businesses, often suppressing demand and leading to a slowdown in economic growth. On Tuesday, the 10-year US treasury bond bond yield was 4.86%.
3. Deterioration of credit conditions
So far this year, the bond market has been more concerned about interest rate risk than credit risk. If this situation changes, it would be bad news.
Kalish stated that although credit spreads have slightly widened, they are still "weak" and the credit environment is still favorable for the overall economy. Credit conditions have remained good as companies generate cash flow in an expanding economy and interest rate payments remain low.
But if credit spreads start to rise, this is the first warning signal that investors should pay attention to, as it may ultimately harm the stock market and economy.
When investors start to worry more about credit risk rather than interest rate risk, we will enter a new and more unsettling stage of the economic cycle