Stocks slipped this morning as sentiment soured on Wall Street. Tech dropped the most despite another blast higher from Twitter (NASDAQ: TWTR). After buying a 9.2% stake in the company, Elon Musk revealed today that he would join Twitter’s board of directors and take a more active role in the social media platform’s future.
Company leadership – the same folks that heavily criticized Musk’s tweets in the past – were quick to celebrate Musk’s coming arrival as a board member.
“I’m excited to share that we’re appointing @elonmusk to our board! Through conversations with Elon in recent weeks, it became clear to us that he would bring great value to our Board,” wrote Twitter CEO Parag Agrawal, who took over for founder Jack Dorsey in November 2021.
Soon after being promoted, Agrawal initiated a massive ban wave that took out scores of right-wing political dissidents. With Musk on the board, many suspended users are hoping to retrieve their old accounts.
And though Twitter stole the spotlight yet again this morning, the market’s far more important story came from Wall Street. Deutsche Bank (NYSE: DB) announced in a premarket forecast that the bank now expects the US to enter a recession in 2023. In making this prediction, Deutsche Bank became the first major Wall Street bank to officially forecast a recession.
Other banks noted increased odds of a recession over the past few weeks, but none outright predicted one.
Deutsche Bank blamed the Fed’s ongoing fight with inflation as the largest driver of an impending slowdown.
“The US economy is expected to take a major hit from the extra Fed tightening by late next year and early 2024,” wrote the bank’s economists in a note to clients.
“We see two negative quarters of growth and a more than 1.5% pt rise in the US unemployment rate, developments that clearly qualify as a recession, albeit a moderate one.”
Stocks were able to initially shrug off the morning note until Fed Gov. Lael Brainard commented on interest rates shortly before noon.
“Inflation is much too high and is subject to upside risks,” Brainard said.
Last month, the market rallied on the hopes that the Fed would abandon its aggressive rate hike schedule in response to a recession.
Now, though, it’s looking more and more like the Fed will hike rates no matter what. It’s ultimately the right decision – even if Treasury markets are screaming “policy error” as the yield curve inverts – but one that bulls viewed as simply inconceivable earlier in the year.
Plus, if Deutsche Bank is right and a recession isn’t coming until 2023, the Fed will have more than enough time to jack rates higher before bringing them lower once more.
What also needs to be considered is whether the Fed will actually be able to beat inflation lower. Through monetary policy, the Fed can lower inflation by lowering demand. But these days, commodities are scorching higher thanks to a lack of supply – something the Fed can’t control.
So, as grim as it may sound, the Fed could end up dragging the US economy into a recession to no avail. Inflation would be partially subdued in this scenario (but not completely) if the sanctions against Russia persist.
That’s why traders need to remain cautious in April despite yesterday’s rally. Yes, the month got off to a good start.
But everything could change if the market fails to stay above the lows of last week, which may very well happen should additional Wall Street analysts follow Deutsche Bank’s lead.
