Stocks Fall on U.S. Recession Worries, U.S. and Europe to Report Purchasing Data
Last Week Review
Global equities continued to fall last week and have plummeted 21.7% on the year. Weakness across all major equity regions contributed to a 5.7% decline in global equities last week. The two-year Treasury yield rose 0.12% to 3.18% and the 10-year yield increased 0.07% to 3.23%. However, this masks significant swings during the week. Globally, interest rate volatility remains elevated and the path of least resistance has been higher. High yield credit spreads significantly widened by 0.64% to 5.03% while investment grade credit spreads increased 0.07% to 1.33%. Stocks suffered from higher concerns of recession as a shift toward tighter monetary policy to fend off inflation weighs on economic growth.
Fed Hikes Rate 0.75% to 1.75%
The rate hike on Wednesday surpassed the 0.50% hike signaled at the previous Federal Reserve meeting, but it was consistent with press reports released early last week and investor expectations heading into the meeting. The Fed also updated its economic projections. The median Fed funds terminal rate projection, or how high the Fed expects the rate to reach in the current rate-hike cycle, rose to 3.8% from 2.8% when last updated in March. Policymakers expect inflation to fall to 5.2% year-over-year and U.S. growth to slow to 1.7% year-over-year for 2022. In the press conference after the Fed meeting last week, Fed Chairman Jerome Powell noted upside inflation surprises have driven the expectations for more hikes, more inflation and less growth reflected in its projections. However, the economy is slowing from a strong footing and a soft landing remains possible. The projected rate hikes were slightly below what was priced into financial markets. Stocks and bonds rallied in response to the Fed action before giving up those gains in the ensuing days.
Shift to Tighter Global Monetary Policy
The European Central Bank held an emergency meeting to mollify surging Italian bond yields. It released a statement noting it will apply flexibility in reinvesting redemptions coming due in its pandemic emergency asset portfolio and it will investigate a new tool to protect against unusual interest rate volatility. The Bank of England raised its policy rate by 0.25% for the fifth consecutive meeting and sent an overall hawkish message. The Swiss National Bank surprised the markets with a 0.50% rate hike. Finally, the Bank of Japan left its accommodative policy unchanged, going against the global trend of tighter monetary policy in the face of inflation risks.
Recession Fears Rise
Weak U.S. retail sales and housing data raised concerns that the Fed’s monetary tightening policy will push the U.S. economy into a recession. China’s retail sales and industrial production data improved from the prior readings but remained soft overall. China’s fixed assets investment slightly beat expectations but continued its downward trend. Overall, global economic data has softened as central banks set out to temper demand.
This Week Preview
Ukrainian War Impacts Energy Prices, Inflation and Fed Policy
European natural gas prices spiked last week after Russia tightened its flows. Germany, France and Italy pledged support for Ukraine to join the European Union after a visit to Kyiv. Meanwhile, Powell made it clear that the war is impacting inflation and Fed policy decisions. While the war has stagnated relative to its onset, the course remains very important for financial markets as it impacts economic growth, inflation, monetary policy and global politics.
Economic Checkups to Occur
Flash Purchasing Managers’ Index data is scheduled to be released Thursday. U.S. services index is expected to slightly rise to 53.7 (prior: 53.4) and the manufacturing index is expected to fall to 56.0 (prior: 57.0). The Europe services index is projected to decline to 55.5 (prior 56.1) and the manufacturing index is projected to fall to 53.8 (prior: 54.6). The data for both regions remain expansionary (above 50), however headwinds are building. The growth outlook is particularly dependent on the course of inflation and resulting central bank policy response.
Fed’s Powell Scheduled to Testify in Congress
Powell is scheduled to testify in Congress mid-week, and he may field questions on economic growth. On Thursday, European Union (EU) leaders is scheduled to convene for a two-day meeting where they will discuss the EU’s war response. Lastly, China’s policy response to its economic struggles remains on watch.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of June 19, 2022.
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