The fallout from Fed Chairman Jerome Powell’s comments continues as Morgan Stanley joins the growing chorus of industry experts warning of hardship on the horizon. Also, the dollar is dealt a significant blow as Russia and China take their oil business away from the greenback.

Yahoo Finance/Fortune/Will Daniel
The stock market has been in free fall since the Fed said ‘pain was coming.’ Morgan Stanley says buckle up for another drop

“Fire and ice” isn’t just a show about dragons and zombies on HBO. It’s been Michael J. Wilson’s vision of the stock market throughout 2022.

Wilson, the chief investment officer at Morgan Stanley, has argued that stocks are fighting a toxic combination of economic headwinds—which he calls “fire” and “ice”—that are set to keep equity prices subdued until late 2023.

The stock market’s summer rally was cut short last month as investors digested a reaffirmation of the Federal Reserve’s hawkish inflation-fighting stance around the same time Europe’s energy crisis took a turn for the worse. But even after a roughly 9% drop in the S&P 500 since mid-August, Wilson says buyers should (still) beware.

In a Tuesday research note, the CIO noted that his fire and ice moniker has “proven to be an effective way to describe the first half of this year,” and he expects that will continue to be the case through December.

Wilson believes the stock market is set to experience “fire and ice, Part 2” over the coming months after Fed Chair Jerome Powell’s comments at an annual central bank symposium in Jackson Hole, Wyo., last week.

Powell argued some “pain” may be required to get consumer prices under control over the next year, and economists noted that asset prices (including stock prices) will need to fall to achieve that goal. The S&P 500 sank more than 5% in the days following Powell’s comments, and Wilson says it was just the start.

While some market pundits and investment advisers made the case that the stock rally was a buying opportunity over the summer, Wilson has contended it was nothing but a trap for investors all along.

His argument was, and is, based on the idea that inflation and the Fed’s attempts to combat it with interest rate hikes act as “fire” against stocks, significantly lowering their valuations. Rising interest rates raise the cost of borrowing for corporations as well, making it more difficult for them to invest in their future growth and turn a profit.

And at the same time, slowing economic growth, or “ice,” is pulling down consumer spending, and by extension corporate earning potential.

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CNN Business/Reuters
Russia says China will start paying for gas in rubles and yuan

Russia’s Gazprom said on Tuesday it had signed an agreement to start switching payments for gas supplies to China to yuan and rubles instead of dollars.

The shift is part of a push by Russia to reduce its reliance on the US dollar, euro and other hard currencies in its banking system and for trade — a drive that Moscow has accelerated since it was hit with Western sanctions in response to its invasion of Ukraine.

Russia has been forging closer economic ties with China and other non-Western countries, in particular as new markets for its vital hydrocarbon exports.

Gazprom CEO Alexei Miller said allowing for payments in Russian rubles and Chinese yuan was “mutually beneficial” for both Gazprom and Beijing’s state-owned China National Petroleum Corporation.

“It will simplify the calculations, become an excellent example for other companies and give an additional impetus for the development of our economies,” he said.

Gazprom did not provide further details on the scheme or say when payments would switch from dollars into rubles and yuan.

President Vladimir Putin earlier this year forced European customers to open ruble bank accounts with Gazprombank and pay in Russian currency if they wanted to continue receiving Russian gas. Supplies were cut off to some companies and countries that refused the terms of the deal.

Russia signed a landmark $37.5 billion extension to its deal to supply gas to China on the eve of the invasion.

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Fox Business/Megan Henney
US housing market downturn to worsen in 2023, Goldman Sachs warns

The U.S. housing market has likely tumbled into its first recession in more than a decade, and Goldman Sachs economists warned that investors should brace for the downturn to get worse.

In a note to clients, Goldman strategists predicted that activity in the housing sector will slow sharply in the coming months, with price growth eventually falling to zero in the third quarter of next year.

“We expect home price growth to stall completely, averaging 0% in 2023,” the Goldman analyst, led by Jan Hatzius, said. “While outright declines in national home prices are possible and appear quite likely for some regions, large declines seem unlikely.”

The analyst note comes as painfully high inflation and rising borrowing costs have forced potential homebuyers to pull back on spending.

But even as home sales decline, prices remain high because supply is still so limited. With mortgage rates soaring and a growing number of potential buyers backing out of deals — and sales dropping to the lowest level in two years — builders have become increasingly reluctant to build new homes, keeping prices high.

A sustained reduction in affordability and a decline in purchasing intentions, however, could lead to further weakening in home sales, thus reducing prices across the board, Hatzius wrote in the note. 

“Higher mortgage rates and reduced affordability are not the only drag on housing,” the note said. “Existing home sales and building permits have fallen more sharply this year in regions where they increased the most in the earlier part of the pandemic, suggesting that the recent declines have also reflected the partial retreat of a pandemic-related boost to housing demand.”

In all, Goldman projects sharp declines this year in new home sales (22% decline), existing home sales (17% drop) and housing GDP (8.9% drop). It projects further declines in 2023, including another 9.2% decline in housing GDP next year.

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