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U.S. needs miracle to avoid recession, economist Stephen Roach warns

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Negative economic growth in the year’s first half may be a foreshock to a much deeper downturn that could last into 2024.

Stephen Roach, who served as chair of Morgan Stanley Asia, warns the U.S. needs a “miracle” to avoid a recession.

“We’ll definitely have a recession as the lagged impacts of this major monetary tightening start to kick in,” Roach told CNBC’s “Fast Money” on Monday. “They haven’t kicked in at all right now.”

Roach, a Yale University senior fellow and former Federal Reserve economist, suggests Fed Chair Jerome Powell has no choice but to take a Paul Volcker approach to tightening. In the early 1980’s, Volcker aggressively hiked interest rates to tame runaway inflation.

“Go back to the type of pain Paul Volcker had to impose on the U.S. economy to ring out inflation. He had to take the unemployment rate above 10%,” said Roach. “The only way we’re not going to get there is if the Fed under Jerome Powell sticks to his word, stays focused on discipline, and gets that real Federal funds rate into the restrictive zone. And, the restrictive zone is a long ways away from where we are right now.”

Despite the Fed’s sharp interest rate hike trajectory, the unemployment rate is at 3.5%. It matches the lowest level since 1969. That could change on Friday when the Bureau of Labor Statistics releases its August report. Roach predicts the rate is bound to start climbing.

“The fact that it hasn’t happened and the Fed has done a significant monetary tightening to date shows you how much work they have to do,” he noted. “The unemployment rate has got to go probably above 5%, hopefully not a whole lot higher than that. But it could go to 6%.”

The ultimate tipping point may be consumers. Roach speculates they will soon capitulate due to persistent inflation. Once they do, he predicts the pullback in spending will reverberate through the broader economy and create pain in the labor market.

“We’re going to have to have a cumulative drop in the economy [GDP] somewhere of around 1.5% to 2%. And, the unemployment rate is going to have to go up by 1 to 2 percentage points in a minimum,” said Roach. “That would be a garden variety recession.”

‘Cold war’ with China

The prognosis abroad isn’t much better.

He expects the global economy will also sink into a recession. He doubts China’s economic activity will cushion the impact, citing the country’s zero-Covid policy, serious supply chain backlogs and tensions with the West.

Roach is particularly worried about the U.S. and China relationship, which he writes about in his new book “Accidental Conflict: America, China and the Clash of False Narratives” due out in November.

“In the last five years, we’ve gone from a trade war to a tech war to now a cold war,” Roach said. “When you’re in this trajectory of esclating conflict as we have been, it doesn’t take much of spark to turn it into something far more severe.”

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Business

Stock futures rise slightly after second-straight negative session

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Stock futures ticked higher on Monday evening as Wall Street sought stability after another down day for stocks.

Futures for the S&P 500 inched upward by 0.1%, while Nasdaq 100 futures also added 0.1%. Futures for the Dow Jones Industrial Average gained 43 points, or 0.1%.

The moves in futures followed a second-straight decline for the major averages. The Dow lost 184 points, or 0.57%. The S&P 500 fell 0.67% and the Nasdaq Composite sank 1.02%.

The market has given back some of its summer gains after recent comments by Federal Reserve officials made clear that the central bank aims to continue its rate hikes, even if they cause economic pain.

“Investors are coming to terms with the idea that the Fed is serious about curbing inflation, even as recent data suggests inflation is starting to decline,” said Rod von Lipsey, managing director at UBS Private Wealth Management.

“We believe the market’s summer rally was ephemeral and continue to recommend that investors remain selective and focus on defensive stock sectors like health care and dividend-paying stocks,” von Lipsey added.

On Tuesday, investors will get several updates on the state of the economy, including the FHFA home price index for June, the Conference Board’s consumer confidence survey for August, and the Bureau of Labor Statistics’ job openings release for July.

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Business

Stocks making biggest midday moves: Netflix, Bristol-Myers and more

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The Netflix logo is seen on a TV remote controller, in this illustration taken January 20, 2022.

Dado Ruvic | Reuters

Check out the companies making headlines in midday trading.

Catalent Inc. – Shares of pharmaceutical company Catalent fell 8% after earnings that disappointed Wall Street. While Catalent beat expectations for earnings, its revenue and full-year outlook were below estimates.

Dow – The chemical maker dropped 2% after KeyBanc downgraded it to underweight from sector weight. The bank said in a note that an economic slowdown, especially in Europe, could hurt demand for Dow and squeeze the company’s profit margins.

Honda Motor – Shares of Honda moved 1.3%  higher after it joined forces with LG Energy Solution to build a new battery production plant for electric vehicles in the U.S. The companies, who plan to invest $4.4 billion, aim to begin mass production of advanced lithium-ion battery cells by the end of 2025. 

Pinduoduo — Pinduoduo surged 18% after topping estimates in the recent quarter on the top and bottom lines. The China-based e-commerce giant said a recovery in consumer sentiment helped results.

Netflix — Shares of the streaming giant rose 1.1% after a Bloomberg report that its ad tier could cost between $7 and $9 a month.

Bristol-Myers Squibb — Shares of Bristol-Myers Squibb slumped 5.3% after reporting results from a mid-stage trial of its developing stroke treatment that failed to meet the main objective of the study.

Energy stocks — Energy stocks jumped in tandem with oil prices rose on news of a potential OPEC+ supply cut. Shares of Diamondback Energy, Marathon Oil, Occidental and Exxon Mobil rose from 3.3% to 4.3%.

Etsy — Etsy added 1.2% following news that it will require U.S. sellers on its platform to verify their bank accounts or provide their username and password to fintech platform Plaid.

— CNBC’s Jesse Pound, Michelle Fox and Carmen Reinicke contributed reporting

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Business

Dow futures sink around 200 points as Friday’s rout on Wall Street looks set to continue

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Traders work on the floor of the New York Stock Exchange (NYSE) on August 26, 2022 in New York City.

Spencer Platt | Getty Images

Stock futures fell on Monday morning as investors tried to shake off a sharp decline in stocks at the end of last week.

Futures for the Dow Jones Industrial Average slid 240 points, or about 0.75%. Those for the S&P 500 and the Nasdaq 100 dropped 0.92% and 1.3%, respectively.

The moves in futures come after a brutal sell-off for Wall Street on Friday, when Federal Reserve Chairman Jerome Powell’s short and blunt remarks in Jackson Hole, Wyoming, appeared to extinguish hopes of the central bank changing its aggressive course of rate hikes in the months ahead.

The Dow fell 1,008 points, or just over 3%, for its worst day since May. The S&P 500 and Nasdaq Composite fell 3.4% and 3.9%, respectively, for their worst days since June. The drop erased the August gains for all three averages.

“Investors again cut back on their recent Risk-On positioning, supporting our view that it is way too soon to call their recent risk appetite a more permanent stance, and now one more likely to have cost them badly,” Rick Bensignor of Bensignor Investment Strategies said in a note to clients.

The coming week brings more Fed speeches, including Vice Chair Lael Brainard on Tuesday, before August’s nonfarm payrolls report on Friday.

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U.S. delisting risk for Chinese ADR stocks halves after deal

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The China Securities Regulatory Commission and U.S. Public Company Accounting Oversight Board announced Friday both sides signed an agreement for cooperation on inspecting the audit work papers of U.S.- listed Chinese companies. Pictured here is the CSRC building in Beijing in 2020.

Emmanuel Wong | Getty Images News | Getty Images

BEIJING — The risk of Chinese stocks delisting from U.S. exchanges has nearly halved after regulators reached an audit agreement, Goldman Sachs analysts said in a report Monday.

The China Securities Regulatory Commission and U.S. Public Company Accounting Oversight Board announced Friday that both sides signed an agreement for cooperation on inspecting the audit work papers of U.S.- listed Chinese companies. China’s Ministry of Finance also signed the agreement.

“This is no doubt a regulatory breakthrough,” Goldman Sachs’ Kinger Lau and a team said, while cautioning that much uncertainty remains.

They pointed out the PCAOB said the deal was only a first step, while the Chinese side said they would provide “assistance” in the inspections.

The PCAOB said it planned to have inspectors on the ground in China by mid-September, and make a determination in December on whether China was still obstructing access to audit information.

The Goldman Sachs analysts said Monday their model “suggests that the market may be pricing in around 50% probability” that Chinese companies could be delisted from the U.S.

That’s down from 95% in mid-March — the highest on record going back to January 2020.

In late 2020, the U.S. Holding Foreign Companies Accountable Act became law. It allows the U.S. Securities and Exchange Commission to delist Chinese companies from U.S. exchanges if American regulators cannot review company audits for three consecutive years.

Since March, the SEC has started to call out Alibaba and other specific U.S.-listed Chinese stocks for failing to adhere to the new law.

Outlook for China stocks

If U.S.-listed Chinese stocks, known as American depositary receipts, are forced to delist, the shares could plunge by 13%, the Goldman Sachs analysts estimated.

MSCI China could fall by 6% under such a scenario, the report said. The index’s top holdings are Chinese stocks listed mostly in Hong Kong, such as Tencent and Alibaba.

A “no-delisting” scenario could send ADRs and MSCI China 11% and 5% higher, respectively, the report said.

Read more about China from CNBC Pro

Few China-based companies have listed in the U.S. following Beijing’s scrutiny of Chinese ride-hailing company Didi’s IPO in late June 2021. Regulators have since tightened restrictions on Chinese companies — especially those with at least 1 million users — wanting to list overseas.

CSRC’s recent moves

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Business

Stock futures slip ahead of Fed Chair Powell’s speech in Jackson Hole

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Stock futures dipped Friday as investors awaited Federal Reserve Chair Jerome Powell’s speech in Jackson Hole, Wyoming.

Futures tied to the Dow Jones Industrial Average fell 87 points, or 0.3%. S&P 500 futures traded 0.4% lower, and Nasdaq 100 futures slipped by 0.6%.

The moves followed an up day for the major averages in which the Dow jumped about 300 points, and the S&P 500 gained 1.4%. The Nasdaq Composite was the outperformer, advancing 1.7% as a pullback in yields helped tech shares.

“Overall, it remains a really attractive moment to invest in equities. Underlying company performance is strong for the highest quality companies, and multiples are down because of macro fears. That’s the setup every long-term investor looks for,” Robert Cantwell, a portfolio manager at Upholdings, told CNBC.

Nevertheless, all the major averages are on pace for their second straight down week. The Dow is on track for a 1.2% decline. The S&P 500 and Nasdaq Composite are heading to slightly smaller declines of 0.7% and 0.5%, respectively.

All eyes are on Powell’s widely anticipated 10 a.m. ET speech at the central bank’s annual symposium in Wyoming.

Investors are hoping for new guidance about how the Fed will act this autumn, but expectations are lower, with many expecting Powell to reiterate the Fed’s promise to slow inflation by raising interest rates. Opinion’s divided on whether the Fed will bump rates by half a percentage point or three quarters of a point at its next policy meeting in September.

The personal consumption expenditures, one of the Fed’s favorite inflation measures, will also be watched ahead of Powell’s speech Friday morning.

“We’re likely to see a relief tomorrow unless we get a big shock from what Powell says,” Gabriela Santos, global market strategist at J.P. Morgan Asset Management, told CNBC’s “Closing Bell: Overtime.” “One thing I would keep an eye out on if we look to next week and into the fall… implied bond volatility is still very, very high for where it normally is in late August, suggesting that actually we’re likely to continue seeing a lot of action in the yield curve, which could affect stock markets in the fall.”

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U.S. stock futures rise after Dow, S&P 500 break three-day slide

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U.S. stock futures were higher Thursday morning after all three major averages ended higher during the daily trading session.

Dow Jones Industrial Average futures gained 220 points, or 0.67%. S&P 500 and Nasdaq 100 futures climbed 0.88% and 0.97%, respectively. Shares of Nvidia slid more than 2% on the heels of a quarterly report that missed Wall Street’s expectations. Salesforce fell more than 4% after the company provided a disappointing forecast for fiscal 2023. Snowflake jumped 16% after posting a beat on revenue.

The Dow Jones Industrial Average gained 59.64 points, or 0.18%, and the S&P 500 rose 0.29% Wednesday. For both averages, the gains snapped three-day long losing streaks. The tech-heavy Nasdaq Composite also ticked up 0.41%.

The market action occurs as investors await the start of the Jackson Hole economic symposium, which begins Thursday with Federal Reserve Chair Jerome Powell scheduled to speak the following morning. Traders will be listening for more information about how the central bank will combat high inflation and if policymakers may cut rates when the current hiking cycle is over.

“It’s steady as it goes, it’s way too early for the Fed to consider a pivot,” said Jim Bianco, president of Bianco Research, on CNBC’s “Fast Money.”

Investors are also waiting for key economic reports scheduled to come out later in the week, including jobless claims Thursday and the personal consumption expenditures Friday. The PCE report is one of the Fed’s favorite inflation measures, and it could influence its actions going forward.

Peloton reports quarterly earnings Thursday before the bell, along with Gap, Dollar Tree and Dollar General. Ulta Beauty, Workday and Affirm Holdings will release their own results after markets close Thursday.

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U.S. stock futures are flat after Dow, S&P 500 break three-day slide

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U.S. stock futures were flat on Wednesday night after all three major averages ended higher during the daily trading session.

Dow Jones Industrial Average futures shed 7 points, or 0.02%. S&P 500 and Nasdaq 100 futures climbed 0.11% and 0.09%, respectively. Shares of Nvidia slid more than 2% on the heels of a quarterly report that missed Wall Street’s expectations. Salesforce fell more than 4% after the company provided a disappointing forecast for fiscal 2023. Snowflake jumped 16% after posting a beat on revenue.

The Dow Jones Industrial Average gained 59.64 points, or 0.18%, and the S&P 500 rose 0.29% Wednesday. For both averages, the gains snapped three-day long losing streaks. The tech-heavy Nasdaq Composite also ticked up 0.41%.

The market action occurs as investors await the start of the Jackson Hole economic symposium, which begins Thursday with Federal Reserve Chair Jerome Powell scheduled to speak the following morning. Traders will be listening for more information about how the central bank will combat high inflation and if policymakers may cut rates when the current hiking cycle is over.

“It’s steady as it goes, it’s way too early for the Fed to consider a pivot,” said Jim Bianco, president of Bianco Research, on CNBC’s “Fast Money.”

Investors are also waiting for key economic reports scheduled to come out later in the week, including jobless claims Thursday and the personal consumption expenditures Friday. The PCE report is one of the Fed’s favorite inflation measures, and it could influence its actions going forward.

Peloton reports quarterly earnings Thursday before the bell, along with Gap, Dollar Tree and Dollar General. Ulta Beauty, Workday and Affirm Holdings will release their own results after markets close Thursday.

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Business

Jim Cramer expects the June market lows to hold and mark the bottom

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CNBC’s Jim Cramer said Wednesday he believes the bear market bottom is in, suggesting Wall Street’s June lows will prove to be durable floor for stocks.

The S&P 500’s closing low this year came on June 16 at 3,666.77, at which point the broad U.S. stock index was down roughly 24% from its all-time highs. It has rallied since then, up about 13% based on Wednesday’s close.

“I like where we are now,” the “Mad Money” host said, while acknowledging the market could “test June’s lows,” because there are “plenty of reasons to be apprehensive.” However, he added, “I’m betting the market will bend, not break, through a rough September, and when we get through that period, that June low will hold.”

Cramer said he came to this conclusion based on what’s happened outside equities. Specifically, he pointed to the fact both the 10-year Treasury yield and the per-barrel price of crude oil topped out around mid-June, as well.

  • The 10-year Treasury yield notched an 11-year high of nearly 3.5% two days before the S&P 500’s June 16 low.
  • West Texas Intermediate crude, the U.S. oil benchmark, also has rolled over since early-to-mid-June, when it settled north of $120 per barrel on multiple days.

“Since the June lows, nothing has happened that would shatter the illusion — or reality — of a bottom,” Cramer said, noting that oil has remained well below $120 and “the vast majority of companies” that reported earnings in July and August “did fine.” In fact, he said there’s been “very few true disappointments.”

“Without a spike in oil, which would cause a collapse in corporate earnings, then I think the June lows will hold. Notice I didn’t say they should hold, I said they will hold. The trial will come when the Fed starts selling its own bond holdings with reckless abandon as they keep raising rates. That could create a test of the lows in September, again, but I’m confident they’ll hold.”

Sign up now for the CNBC Investing Club to follow Jim Cramer’s every move in the market.

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Business

Stock futures lower following the S&P 500’s third straight losing day

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European markets flat as global investors wait for Fed

European markets were muted on Wednesday as new hawkish comments from a U.S. Federal Reserve policymaker kept investors hesitant.

The pan-European Stoxx 600 index was flat in early trade, with telecoms shedding 0.5% while household goods gained 0.2%.

– Elliot Smith

Morgan Stanley says the ‘smart’ EV industry is tech’s next big thing. Here are its top stock picks

Morgan Stanley says tech supply chains are about to experience growth in the next big thing: smart tech features — from EV batteries to chips and self-driving tech.

The investment bank named its top stock picks that’s set to benefit from this trend.

Pro subscribers can read the story here.

— Weizhen Tan

Fed’s Kashkari says his biggest fear is inflation will be more persistent or hotter than anticipated

Federal Reserve bank of Minneapolis President Neel Kashkari says his biggest fear is that markets are underestimating how high inflation will go or how persistent it would be, adding that the Fed might need to be more aggressive than anticipated.

“The big fear I have at the back of my mind is if we’re wrong and markets are wrong, and that this inflation is much more embedded at a much higher level than we appreciate or markets appreciate,” he said, commenting on market expectations of inflation coming back down to 2% within the next two years.

“Then we’re going to have to be more aggressive than I anticipate, probably for longer, to bring inflation back down,” he said, speaking at an event at the University of Pennsylvania.

Kashkari also pointed towards supply-side shocks driving “half to two-thirds” of the nation’s high inflation.

“The more help we get from the supply side, the less the Fed has to do, and the better we’re able to avoid a hard landing,” he said. He did add, however, there’s some evidence that supply chains are beginning to normalize.

Kashkari is already considered the most hawkish of the U.S. central bank’s 19 policymakers, and expects the Fed to need to lift its policy rate — now at a target range of 2.25% to 2.5% — another two full percentage points by the end of next year.

–Jihye Lee

CNBC Pro: Citi names the energy stock with the ‘strongest balance sheet’

The energy sector has been a big winner in this year’s volatile stock market.

But one stock still stands out for its “strongest balance sheet,” according to Citi. It also delivered a set of second-quarter earnings that handily beat its major listed peers.

Pro subscribers can read the story here.

— Zavier Ong

Hawkish Fed?

Many are expecting hawkish talk from Fed officials later this week, which could spark a sell-off in risk assets. Some fear that the central bank’s continuous and aggressive tightening will tip a slowing economy into a recession.

“I fully expect Fed Chair Jay Powell and other Fed officials to remain hawkish,” said Invesco chief global market strategist Kristina Hooper, in an e-mail. “Aggressive rhetoric would be very likely to send stocks down globally in the near term, as markets are walking on eggshells, so asset owners should be prepared for short-term volatility.”

— Yun Li

Nordstrom shares tumble

Shares of Nordstrom dropped more than 13% in extended trading after the company slashed its financial forecast for the full year. Nordstrom said it’s challenged by excess inventory as well as a slowdown in demand.

“Customer traffic and demand decelerated significantly beginning in late June, predominantly at Nordstrom Rack,” CEO Erik Nordstrom said in a press release.

The company did report fiscal second-quarter earnings and sales ahead of analysts’ estimates, however.

— Yun Li

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