The US is teetering on the edge of a recession. Now the renewed banking turmoil and the country’s imminent insolvency could lead to a crash. Why the central bank is largely powerless.
In times of uncertainty, the longing for simple truths grows – this probably also applies to stockbrokers. In any case, on Tuesday investors remembered an old truism: “Sell in May”. The Dow Jones Index and S&P 500 fell significantly. Several factors caused the frustration at the start of the merry month: The fear of new banking turmoil is back. “That part of the crisis is over,” JPMorgan boss Jamie Dimon had reassured after the rescue operation for the struggling First Republic.
Investors don’t seem convinced. Their flight reflex pushed the courses of the US regional banks by more than ten percent. The scenario of an American default is drawing near. Treasury Secretary Janet Yellen said the US would run out of money in early June.
The financial markets are still calm, but you can already smell the harbingers of the storm: The costs of insuring yourself against credit defaults in the USA (so-called CDS) have risen significantly. And in April, many investors switched money to short-dated one-month US Treasuries because they would not be affected by a default.
At the same time, the economic situation in the USA is deteriorating. The number of vacancies fell again in March, and companies are now offering 1.6 million fewer jobs than in December.
So is a hard landing inevitable? The economists are divided. “A recession sooner or later remains more likely than unlikely,” said Jake Jolly, head of investment analysis at BNY Mellon Investment Management, on CNN.
The US Federal Reserve will also have to grapple with the growing uncertainty at its meeting this Wednesday. In the view of Fed Chair Jerome Powell, the cooling of the labor market is entirely intentional in order to alleviate inflationary pressure.
And the banking crisis is also helping the currency watchdogs – as long as there is no financial crisis: if the industry shuts down its lending, it slows down economic activity. Nevertheless, the Fed is likely to raise interest rates by a further 25 basis points for the tenth time in a row.
From the market’s point of view, the step is digestible, what is decisive is what comes afterwards: whether Powell calls the interest rate pause or reserves the right to further increases. This could then further weigh on the stock markets. The failure of three US banks in quick succession is “a pretty clear indicator that monetary policy is already too tight,” warns economist Ian Shepherdson.