JHigher-than-expected US CPI data completely killed the “Fed pause” bets that had spurred the market’s fleeting rebound. Yields on short-term US bonds rose above those on long-term bonds, with US 5- and 30-year bond yields returning to inversion, again signaling economic recession warning. But it should be noted that historically, a recession usually occurs 18-24 months after reversal and is followed by negative GDP growth and falling inflation. This signals that the Fed needs to “front” rate hikes to ease inflationary pressures at the expense of economic growth. It might be difficult to achieve a “soft landing” if that’s what happens.
With the high expectation of a 50 basis point rate hike by the Fed this week, any softening in Chairman Jerome Powell’s tone could be seen as a positive sign in extreme fear sentiment, although bond markets now price in an oversized rate hike of 75 basis points.
In China, Beijing and Shanghai have restarted disorderly testing for Covid-19 in some areas, with Shanghai once again shutting down part of the city, adding to bear market fear factors. However, Asian stock markets have outperformed their US and European peers over the past three months, with the devaluation of the Japanese yen and Chinese yuan supporting stocks in both countries, which could become alternative flows from investment funds.
Key points
- Are oil prices likely to remain subdued? Despite a 3-month high in crude prices, oil markets slowed last week on renewed fears of recession and China’s partial shutdowns. See oil prices
- US equities have yet to bottom, with the S&P 500 once again approaching the year’s low. Will the Fed’s dot-plot projection provide positive clues? SPX Motion Monitoring
- Australian equities ended last week badly, hit hard by the RBA’s oversized rate hikes. From a technical standpoint, the ASX 200 may continue its downtrend, heading towards an 18-month low. See the Australia 200 trend
- USD/JPY hit a new 20-year high as US 10-year bond yields continue to climb. There is little chance that the BOJ will provide a ceiling for the pair this week. View USD/JPY price
- Cryptocurrencies have been hammered to the edge, with Ethereum heading towards the lowest level seen in March 2021. Will financial market turmoil bring digital assets back to pre-pandemic levels? See cryptocurrency movements
Key economic data and events (June 13 – June 19)
China Retail Sales (May) – Wednesday
China’s economy was hit hard by strict Covid lockdowns in April, when retail data fell 11.1% year-on-year. It should recover quickly since, with a growth forecast of 0.5% in May. Industrial production is also expected to improve to -0.1% in May, from -2.9% the previous month.
FOMC Meeting – Thursday
As previously expected, the Fed will raise interest rates an additional 50 basis points to 1.5% on Thursday and 50 basis points in July to 2%. The Reserve Bank will also begin trimming its balance sheet by $47.5 billion, or “QT,” starting this week, with the aim of increasing the size to $95 billion a month by September. Futures markets have priced in a 50 basis point rate hike at each of the next meetings, driving the benchmark rate to 3.5% by the end of the year, according to Bloomberg. The Fed’s dot chart will be a key element in assessing the future trajectory of funds rates.
US PPI data and retail sales for May will be released on Tuesday and Wednesday respectively, which are the main economic indicators for gauging the cost of goods that have been made and consumer demands, providing clues on the path of inflation. . According to Thomson Reuters, the consensus calls for a high PPI of 0.8% in May against 0.5% in April. Retail sales are expected to fall to 0.2% in May from 0.9% in April, signaling that the rising cost of living may begin to dampen demand.
Employment Australia (May) – Thursday
Another strong Australian jobs data is expected for May, 25,000 new jobs are expected, which is not good news for stocks and local currencies. Currently, central banks are becoming very aggressive in rate hikes, making strong economic data bad news for risky assets.
New Zealand GDP (Q1) – Thursday
The consensus calls for a slowdown in the first quarter of New Zealand GDP growth, with 5.3% y/y against 5.6% in the previous quarter, and 0.6% q/q, against 3% in Q4 in reason for the omicron outbreak. But it is a lagging indicator for the economy which should have recovered since April when the country raised the Covid alert level to orange.
BOJ policy meeting
The Bank of Japan is not expected to change its guidance to control the government bond yield curve by keeping the 10-year JGB yield below 0.25%, although the Japanese CPI just hit the target inflation rate above 2%. Any hint of less dovish rhetoric from the BOJ will certainly put a cap on the rally in USD/JPY. However, luck is low in this encounter.
BOE policy meeting – Thursday
The Bank of England is expected to raise the interest rate by another 25 basis points, to 1.25% at the next meeting, as UK inflation climbed to 9% in April, despite a recession warning from the bank central. The country’s economy is stagnating due to the war-triggered energy crisis and soaring consumer prices, causing the bank to struggle to deploy a 50 basis point hike.
Upcoming European Week
- Average earnings in the UK (April)
- JD Sports full year
- Tesco first quarter results
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