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Why it's too early for nervous investors to balk at the recession



The troubled action highlights the deep uncertainty of the financial markets. Is it a soft area, like many other people who have survived the economic boom that has lasted for a decade? Or is it something more serious?

Jeffrey Sherman, deputy chief investment officer of DoubleLine Capital, urges investors to be cautious before making reckless moves – one way or the other.

"It's too early to go back," Sherman told CNN Business. But this is not the moment to add big risks, he said.

Sherman's boss, famed investor Jeff Gundlach, said at a webcast Thursday that he saw between 40% and 45% chance of a US recession within six months. DoubleLine Capital, which manages $ 130 billion in assets, migrated up the credit spectrum as the firm evaluated the outlook.

The problem is that there are a lot of mixed signals.

In the bullish period, retail sales in the US grew at a brisk pace in May. Buyers rushed on electronics, appliances, and of course, online. Small business optimism rebounded last month at the best level since the fall.

And the Trump administration has moved away from its frightening threat of imposing tariffs on all goods from Mexico.
But the signals of caution were numerous. Broadcom (AVGO), a leader in the microchip industry, has drastically reduced revenue expectations as a result of US-China trade tensions and a "generalized slowdown" in demand. China's industrial output slowed in May at the slowest pace in 17 years.

And most alarming, the bond market was weird.

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The yield curve – the gap between short and long-term treasury bond yields – is reversed, indicating that investors believe that the Federal Reserve's policy has become too restrictive. The inversion has been a reliable indicator of the recession in the past.

"We do not have enough signals yet," Sherman said. "The only thing that is flashing red is the yield curve."

These conflicting messages only make life more difficult for Fed chief Jerome Powell, who continues to be pressured by the White House and Wall Street to quickly cut interest rates.

"Nobody wants it at this point," Sherman said.

2. High hopes for Jerome Powell: The stock market is betting on a reduction in the interest rate by the Federal Reserve as soon as possible. While the political news of the central bank next Wednesday is expected to announce no novelty, market expectations of a July rate cut are now 87%, according to the FedWatch CME tool.
The stock experienced an epic recovery last week, motivated by the hope of a rate cut that would boost the US economy. It all started with Powell, who said the central bank would act appropriately to support economic expansion in the United States. In response, the Dow, S & P 500 and Nasdaq Composite all recorded their best week of the year.
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All of this comes only six months after the Fed took the lead in terms of rate hikes. The central bank raised rates nine times in all, ending in December, reducing them to extremely low levels in the aftermath of the financial crisis. Since then, Powell has stressed that the Fed must be "patient" before his next move.

That said, it's a safe bet that the central bank will give investors more guidance on its intentions in advance. And that's why next week's Fed press conference will be so closely monitored.

Things could go both ways: Powell could discuss economic data that depreciate expectations and repeat that the central bank intends to support the economy, suggesting a reduction in rates. This could lead to a gathering of actions. Lower interest rates are advantageous for businesses and what is good for companies is also for the stock market.

However, Powell could also point out that the Fed will need some additional data points before making a decision on interest rates, thus pushing the rate-cutting potential at the Fed meeting in September and leaving investors promising on foot. The second option could result in a decline in stocks.

"I do not think the Fed wants to disappoint the market again," said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, adding that Powell's Fed was the most market-driven central bank.

In one way or another, the week seems unstable.

3. The tariff hearings begin: The US Trade Representative's office will hold public hearings on rates starting Monday. Businesses and leaders of industry trade groups should testify.

President Donald Trump has threatened to impose tariffs on an additional $ 300 billion worth of products imported from China, including toys, clothing, footwear, home appliances and televisions. Last month, the Trump administration increased tariffs by $ 25 billion, compared with 10% for $ 200 billion worth of Chinese goods.

Before the hearings, more than 600 companies and professional associations in the sector, Walmart (WMT), Costco (COST), Target (TGT), gap (GPS), Levi Strauss (LEVI) and Foot Locke (FL)r – writes to the White House urging Trump to remove taxes on China and end the ongoing trade war.

"We know that the additional fees will have a significant, negative and long-term impact on US companies, farmers, families and the US economy," the companies said in their letter.

4. Key test for Boeing: The Paris air show starts on Monday at a particularly crucial time for Boeing (BA), one of the two leading commercial aircraft manufacturers in the world. As a rule, Boeing and Airbus have to advertise their orders for hundreds of aircraft. However, as the 737 Max is still stuck and deliveries are interrupted, it can be difficult for Boeing to announce the typical number of orders this year. He has not announced any orders for a commercial aircraft for more than two months.

5. Coming next week:

On Monday – Paris Air Show, report on foreign ownership of the US Treasury

Tuesday – Adobe revenue, US housing starts and US Senate tariff hearing

Wednesday: Fed decision and press conference, benefit of Oracle (ORCL) and Barnes & Noble (BKS)
Thursday: US leading indicators, Bank of England rate decision, earnings of Darden (DRI), Kroger (KR) and Red Hat (RHT)

Friday: Sales of existing homes in the United States, Markit US manufacturing flash PMI


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