fedex sShockwaves rippled through markets on Friday after the company withdrew its full-year forecast and warned a global recession was brewing.
FedEx’s stock fell more than 22% after the market opened following the announcement that it expects to fall to $500 million from its revenue target, the biggest drop since in minus 1980. The news is an indicator that global demand is slowing, which could portend a recession.
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The company said it expects first-quarter earnings of $3.44 per share, well below analysts’ average estimate of $5.10.
“Global volumes declined as macro trends worsened significantly later in the quarter, both internationally and in the U.S. We are tackling these headwinds quickly, but given the speed at which conditions have changed, the first quarter results are below our expectations,” said FedEx CEO Raj Subramaniam. in a report.
Due to the poor outlook, FedEx announced it would close dozens of locations, freeze hiring and take other immediate steps to cut costs.
Transportation and shipping stocks are seen as a leading indicator of the health of the economy and the performance of the broader stock market, so FedEx’s bleak outlook has investors panicking that a recession could be right on the doorstep of the country.
The Dow Jones Industrial Average was down nearly 400 points at noon Friday. The tech-heavy Nasdaq plunged more than 1.8% and the S&P 500 fell more than 1.5% on FedEx news.
Adding fuel to the fire, Subramaniam appeared on CNBC, where he was asked if the economy was entering “a global recession”.
“I think so. But you know, those numbers, they don’t bode well,” Subramaniam replied. “I’m very disappointed with the results we just announced here, and you know, the headline is really macro situation we are facing.”
Deutsche Bank released a statement to customers highlighting how bad FedEx news was compared to expectations.
“FedEx last night pre-announced the weakest set of results we’ve seen relative to expectations in our ~20 years of analyzing the companies,” bank analysts said in a note to clients.
Slowing demand raises fears of a recession as the Federal Reserve continues to raise rates in an attempt to rein in the country’s runaway inflation, which is now running at 8.3% a year, as measured by the consumer price index of August. .
“FedEx’s warning came like a slap in the face. It’s a solid sign that the economy has started to slow down,” said Ipek Ozkardeskaya, senior analyst at Swissquote. ‘warnings we may see for the coming quarters.’
While stocks are down for Friday, they fell even more precipitously earlier in the week, posting their worst daily performance in more than two years. August’s CPI report rattled investors as it was warmer than expected, raising the odds that the Fed will be forced to raise rates even further in order to depress sky-high prices.
Following the CPI report, the Dow Jones Industrial Average suffered its seventh largest point drop in US history. The tech-heavy Nasdaq composite fell more than 5% and the S&P 500 fell 4.3%.
The Fed has raised rates twice by 75 basis points so far this year. The first hike marked the most aggressive hike since 1994, and there is expected to be another giant rate hike after the Federal Open Market Committee meeting next week.
Investors now see an 86% chance of a 75 basis point hike and a 14% chance that the Fed will go even further and hike rates 100 basis points at a time, according to CME Group’s FedWatch tool. , which calculates the probability using Fed finance futures prices.
Bigger and more frequent rate hikes make a recession more likely. Certain elements of the economy indicate that a recession is apparently inevitable.
The Bureau of Economic Analysis recently announced in a revised estimate that GDP fell at an annualized rate of 0.6% in the second quarter. It came after negative GDP growth of 1.6% in the first quarter – bad news for the economy because two quarters of negative GDP growth usually constitutes a recession in the minds of economists.
This week, mortgage rates also topped 6% for the first time since 2008, meaning housing is less affordable and home sales and new construction are slowing.
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On Thursday, the average 30-year fixed-rate mortgage was 6.02%, up more than 3.1 percentage points from a year earlier, according to Freddie Mac. That’s a jump of 0.13 points in the last week alone. The average 15-year fixed rate mortgage rose to 5.21%.
The Fed is due to meet on Tuesday and Wednesday of next week, when it will decide how much to raise interest rates again.