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Wall Street finally turns it around after 3 weeks of steep losses

Hoping they hit a basement for equities, investors are pushing ahead and trying to keep worries about a recession from materializing.

MANHATTAN (CN) — Wall Street pulled ahead for a much-needed win this week, as the past three weeks of losses still weigh on equities and investors expect the Federal Reserve to once again raise rates aggressively next month.

By Friday’s closing bell, the Dow Jones Industrial Average had gained 826 points, about a 2.7% increase — and 1,615 points for the week — while the S&P 500 and Nasdaq rose 238 points and 809 points for the week, respectively.

The gains are a welcome respite from the last few weeks, but many experts are not yet ready to declare it a permanent turnaround on Wall Street.

“Recession warnings are exploding across Wall Street,” wrote Tom Essaye of the Sevens Report, citing former New York Federal Reserve President Bill Dudley's comment that a U.S. recession is “inevitable” in the next year or so.

“That’s partially why stocks are down so much [year to date], so to a point at least some of any recession is already priced in,” Essaye wrote Friday morning. “By the time the economy is in ‘recession’ stocks may well have bottomed and will be looking toward the recovery.”

One good indicator of where investors’ minds are at is bond yields, which have been inching upward, indicating Wall Street thinks a recession is on the horizon. The yield on 10-year Treasury bonds — while lower than a week ago — has been increasing since Wednesday. Near the end of trading on Friday, the five-year yield hit 3.13. The 30-year Treasury bond yield also has been increasing.

As Essaye notes, however, there are recessions, and then there are recessions — the distinction being how long they last. “History implies the key going forward will be to break inflation quickly and decisively, so relief can be given as soon as possible,” he wrote.

Other experts are also hedging a recession as at least short if not unlikely. “The surge in interest rates, plunge in the stock market and weakness of consumer confidence have fueled fears of an impending recession, but there is still little sign of that in the incoming economic data,” a team of analysts at Capital Economics wrote on Thursday.

“The strength of payroll employment growth, which is averaging close to 400,000 per month, is particularly hard to square with claims that a recession is imminent,” they continued. “Admittedly, with inflation rampant, that is likely to keep the Fed raising interest rates aggressively … but with underlying demand still strong, a slowdown in growth is still the more likely outcome.”

A great deal of market will depend, however, on what the Fed does. During testimony on Capitol Hill, Fed Chair Jerome Powell cited the “extremely tight” job market, noting unemployment is at a nearly 50-year low, job vacancies are at historic highs, and wage growth is elevated.

Keeping the central bank’s focus on inflation, Powell again hinted at another 75-basis-point interest hike on the July horizon, something he also noted during the press conference last week after the Fed jacked rates by that much this month.

“Inflation has obviously surprised to the upside over the past year, and further surprises could be in store,” he told Congress. “We are highly attentive to inflation risks and determined to take the measures necessary to restore price stability.”

But Powell also noted, on questioning from Senator Elizabeth Warren, that a recession could also be in the works. “It’s certainly a possibility,” he responded to her warnings, noting, though, that “the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and a strong labor market.”

Others at the Fed have indicated a 0.75% interest rate hike in a couple weeks is a fait accompli. “Based on the current inflation readings, I expect that an additional rate increase of 75 basis points will be appropriate at our next meeting, as well as increases of at least 50 basis points in the next few subsequent meetings, an along as the incoming data support them,” Governor Michelle Bowman said in a speech to the Massachusetts Bankers Association this week.

“With inflation much higher than the federal funds rate, the real federal funds rate is negative, even after our rate increases this year,” Bowman added.

Despite the Fed’s newfound hawkishness on interest rates and acknowledgement that inflation is a problem, longtime critics of the central bank say the Fed has been too little too late on addressing inflation. “Though I am pleased you have begun taking the drastic action necessary to right the U.S. economy, these actions are long overdue and monetary policy remains too loose,” Senator Thom Tillis, a North Carolina Republican, said.

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