Concerns about stagflation continue to grow as recent data showed economic growth slowing sharply and inflation rising.
Now Wall Street cannot ignore this unpleasant issue as its presence begins to be felt in financial markets, particularly bonds.
“I think what we’re seeing here is I’m starting to feel a touch of stagflation, dare I say,” Steve Sosnick, chief strategist at Interactive Brokers, told Bloomberg TV on Friday. “I know that’s a dirty word in many circles.”
He called the first-quarter GDP report terrible on Thursday, pointing out that growth slowed much more than expected to 1.6% from 3.4% in the fourth quarter.
Meanwhile, the report also showed that inflation, as measured by the personal consumption expenditure index, accelerated to 3.4% from 1.8% in the previous quarter.
“Well, when the economy is weak and inflation isn’t going down, you kind of have to think in those terms,” Sosnick added. “And so it was kind of shocking to see bond yields rising on a day when GDP was falling sharply. So it must be because of this other inflation nervousness.”
Analysts are calling the latest data the “worst of both worlds” as inflation remaining stubbornly above the Federal Reserve’s 2% target will prevent them from cutting interest rates, which they have done in the past in response slowing economic growth has done.
Expectations that the Fed will be forced to continue its tight monetary policy for longer pushed the 10-year Treasury yield back up to 4.7% in recent days before falling again, although markets fear a return to 5% is possible.
The rebound in bond yields, impacting other borrowing costs such as mortgage rates, has also hit stocks, particularly growth-oriented tech giants like Nvidia.
Investors should be “a little concerned,” Sosnick warned, saying the time to buy amid a broad market rally is over.
“Switching between stocks and bonds is starting to get nerve-wracking,” he added.
Markets ignored this dynamic earlier in the year as a relentless “fear of missing out” continued the stock rally, while the rise in bond yields was attributed to a strong economy, which can help stocks – up to a point, he explained .
However, as growth cools and inflation rises again, the bond market is now coming under pressure. And with a Fed meeting and monthly jobs reports coming next week, downside risk in stocks remains significant, Sosnick warned, noting that the market was down 4% to 5% but the correction that is typically considered , have not completed a decline of 10%.
Others on Wall Street also expressed concern that the data points to a stagflation scenario.
On Tuesday, JPMorgan CEO Jamie Dimon said the economy more than ever resembled the 1970s, when both inflation and unemployment were high but economic growth was weak.
He also pointed out that some indicators in 2024 could be worse than in 1970, saying: “If you look back to the 70s, deficits were half what they are today, debt to GDP was 35% and not 100%,” and that’s why I think part of the reason we’ve seen this strong growth is due to household spending.”
Also this week, Mark Haefele, global wealth management investment head at UBS, told MarketWatch that he wasn’t worried about a single data point: “Nobody is really prepared for stagflation.”
This story was originally published on Fortune.com