By David Randall

NEW YORK, (Reuters) – Wall Street may be getting some bad news once more as indicators of slower U.S. economic growth are causing people to believe that the Federal Reserve might not have to increase policy as aggressively as they had previously thought.

For the third month straight, home sales fell while major misses by retail giants like Target Walmart (NYSE 🙂 and (NYSE 🙂 saw their shares fall last week. In the meantime, Atlanta Fed’s GDPNow estimate for real GDP growth for second quarter declined to 1.8% from 2.4% May 18.

A slower economic growth could lead to lower corporate profits and, therefore, soften share prices. In recent weeks, several Wall Street banks warned of rising chances for a U.S. economic recession and an increase in the likelihood of low-growth, high inflation environment called stagflation.

However, investors see a slowing economy as a positive sign that the Fed could ease off its aggressive monetary policies. This month’s 20% drop was interpreted by many to be a bear market.

This index has increased 4% in the past week, and it’s on track for snapping a seven-week losing streak. It’s still down about 15% so far this year. Data from BofA Global Research revealed that net weekly inflows of U.S. stock stocks were at their highest levels in 10 week.

It is clear that all Fed staff are onboard for 50 basis points (interest rate increases) at the Fed’s next two meetings. It’s not clear what they will do after that. If there is a slowdown in economic growth they may be willing to delay a while,” Anwiti Bahuguna said, Anwiti Bahuguna who was a senior portfolio manager at Columbia Threadneedle Investments and heads multi-asset strategies. She recently increased her allocation to equities.

In September, the BofA strategists stated that there are concerns about the effect of raising rates when inflation is at its peak. They will stop tightening and leave their benchmark overnight rate unchanged at 1.75% to 2.2% in the event of worsening financial conditions.

Investors now expect Fed hawkishness to be less. They are pricing in 35% chance that Fed funds rates will hover between 2.25-2.50% following its September meeting. This is down from 50% a week earlier, according CME.

Minutes from the central bank’s latest meeting showed officials grappling with how best to navigate the economy towards lower inflation without causing a recession or pushing the unemployment rate substantially higher.

Anders Persson is chief investment officer for global fixed income at Nuveen. He said that signs of slowing growth have helped boost Treasury prices. This has been because investors are more interested in bonds than high-inflation assets.

The benchmark 10-year Treasuries Yields hit a 6-week low at 2.706%, on Thursday. It had risen to 3.14% earlier this month.

He said that the market was pricing in a slowdown, but not recession. This makes riskier segments of fixed-income markets, like high yield bonds, attractive.

U.S. data showed Friday that prices may slow down, according to U.S. statistics. After a 0.9% increase in March, the personal consumption expenditures price index (PCE), saw 0.2% growth. This is the lowest gain since November 2020.

Equity buyers should not be encouraged to buy equity if the Fed becomes less hawkish in the near future. Inflation is at its highest level in many decades. Concerns have grown about impending stagflation. This phenomenon has weighed heavily upon all asset classes since the supply shocks that occurred in the 1970s.

Among those sounding the warning are hedge fund manager Bill Ackman, a member of the Fed’s investor advisory committee on financial markets, who on Twitter (NYSE:) this week urged the central bank to quell inflation by raising rates more aggressively.

Citi’s global asset allocation team said this week that its U.S. equity allocation was “neutral” and stated, “While the U.S. recession does not represent the base case for Citieconomics, there is uncertainty.”

However, some investors believe that a turning point is near.

Esty Dwek (chief investment officer at FlowBank) believes that the central banks will see signs of slowing growth and inflation by August’s meeting in Jackson Hole.

She said, “The Fed is beyond peak hawkishness.”