An additional 27% drop in the S&P 500 could occur if inflation hawks are right, Goldman Sachs warns

Not exactly TGIF on Friday.

What the sell side is slowly realizing is not only that the Fed will be aggressive in September after the latest shocking inflation numbers, but the central bank will have to keep interest rates high and for longer. British Pound GBPUSD,
-0.75%And the
In some ways a proxy for financial market conditions, it fell to its lowest level since 1985 against the US dollar on Friday, moving below $1.14.

In a new note to clients, Goldman Sachs Chief Markets Economist Dominic Wilson and global markets strategist Vicki Chang break down the numbers on what it might mean if the Federal Reserve should take a more aggressive course than the market expects.

The results are not great. If the Fed has to hit the economy hard enough to raise the unemployment rate to 5%, the S&P 500 SPX,
Should fall 14% below 3400, yield on 5-year bond TMUBMUSD05Y,
It should rise 91 basis points, and the trade-weighted dollar will rise by 4%.

In the most extreme scenario where the unemployment rate should hit 6%, the S&P 500 would drop 27%, to below 2,900, the 5-year Treasury yield would rise 182 basis points, and the dollar would rise 8%.

(The Fed’s own last point chart shows the unemployment rate rising to 4.1% in 2024, and Goldman’s house forecast is that the unemployment rate will reach 4% by the end of 2024.)

Goldman’s new forecast isn’t great, but it does fall within the range of previous pullbacks.

This harsh scenario includes a tightening of financial conditions comparable to the global financial crisis of 2008, and before that the recessions of the early 1980s.

“If only a severe recession — and the Fed’s sharpest response to getting it done — is to tame inflation, then it is likely that the downside of both stocks and government bonds could remain significant, even after the damage we have already seen,” he said. Strategists.

Incidentally, Goldman headed into the new year predicting that the S&P 500 would close in 2022 at 5100.


US stock futures ES00,

It was a pessimistic start. DXY dollar,
+ 0.38%
He saw renewed strength. CL.1 Crude Oil Futures,
It was trading around $85.


FedEx FDX,
Shares fell 20% in pre-market trading after it issued a warning in the fiscal first quarter and withdraw guidance for the rest of the year. UPS rivals UPS,
and Deutsche Post DPW,
also fell.

General Electric GE,
CFO Carolina Hub said at an investor conference that she sees continuing supply chain pressures that will affect free cash flow in the third quarter.

uber uber,
+ 0.24%
She said she is responding to a cybersecurity incident and has reached out to law enforcement authorities.

She said she would split into two companies, rather than sell herself.

Germany has seized the assets of three Russian oil refineries, which account for 12% of the country’s oil refining capacity.

The only data available is the University of Michigan Consumer Sentiment Index, at 10 AM ET, with the report’s inflation reading forecast set to be watched closely.

The White House has released a series of reports on digital assets where it points to warnings about the financial stability of cryptocurrencies.

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There is good news and bad news with this graph compiled from Bank of America, which shows rising credit card use in both the US and UK. The bad news, of course, is that Americans and Brits feel the need to borrow to support household expenses as inflation rises. But the good news is that they are still spending.

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