A review of the week’s top global economic and capital markets news.
As of noon on Friday, global equities were sharply higher on the week as investors shifted their focus from inflation to the risk of recession. Softer global economic data and a decline in commodity prices have caused the market to modestly trim central bank rate-hike expectations. The yield on the US 10-year Treasury note declined to 3.09% from 3.26% a week ago while the price of a barrel of West Texas Intermediate crude oil fell about $5 to $105.50. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 28.4 from 33.
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Powell admits difficulty of achieving soft landing
During testimony on Capitol Hill this week, US Federal Reserve Chair Jerome Powell said that the Fed is not trying to provoke a recession but that one is certainly possible as the central bank tightens policy to restrain surging inflation. He restated the Fed’s unconditional commitment to fighting inflation, commenting that allowing inflation to become entrenched would be more painful for the economy than a recession. Powell testified that global events, such as the war in Ukraine and continued supply chain disruptions in China, could make achieving an economic soft landing more difficult. Markets, the Fed chair said, have discounted an appropriate path for rate hikes and a lot has been priced in, and this has begun to impact the economy.
Growth slowdown becoming evident
Flash purchasing managers’ indices for the US and eurozone showed that the pace of economic growth in developed economies slowed notably in June. The US manufacturing PMI decelerated to a 23-month low, the eurozone to a 22-month low. The services readings in both regions fell to levels not seen since the Omicron wave five months ago, though all the readings remain above 50, the level that separates growth and contraction. Interest rates fell sharply this week amid rising recession fears, as did the prices for a range of raw materials. A paper published this week by the Fed put the odds of recession in the next 12 months at 50% and the probability of one over the next two years at 66%.
US home sales data mixed; prices make new high
Existing homes sales in the United States fell 3.1% in May to the weakest level since the early months of the pandemic. Low inventories of unsold homes continued to push prices higher, with the median sales price breaking above $400,000 to hit a record $407,600, an increase of 14.8% from a year ago. However, new homes sales unexpectedly rose 10.7% in May. The Mortgage Bankers Association reported that the average 30-year mortgage rate in the US rose to 5.98% this week, the highest percentage since 2008.
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Long-term inflation expectations, as measured by the University of Michigan Survey of Consumers, moderated in the final June reading to 3.1% from 3.3% in the preliminary view. The Fed cited the jump in inflation expectations as one of the catalysts for last week’s three-quarter-point hike in the fed funds rate.
Along with demand destruction caused by high prices, the Biden administration believes that China and India are buying more discounted Russian oil than earlier believed, helping the global market come into better balance.
Germany is moving toward rationing natural gas as Russia throttles back supplies delivered via pipelines. Officials are particularly concerned by the low level of supply as they seek to top up gas in storage facilities before winter. Concern is mounting that industrial production will be impacted and that coal-burning power plants will need to be brought back online to make up for the gas shortfall.
The Bank of Mexico raised rates 0.75% to 7.75%, the largest increase since 2008. Norway’s Norges Bank is the latest central bank to hike rates more sharply than expected, increasing its policy rate by 0.5% to 1.25% while signaling that another hike is likely in August rather than in September, as expected.
European Union leaders on Thursday formally agreed to making Ukraine, along with Moldova, a candidate for membership in the bloc. To be granted full membership, Ukraine will likely have to undergo a lengthy reform process.
Despite opposition in his ranks, Biden called on the US Congress to suspend the $0.18 a gallon federal gas tax for three months.
Inflation continued to make new highs in a number of countries as the United Kingdom reported its consumer price index rose 9.1% year over year in May. Canadian CPI rose 7.7% over the same period.
French President Emmanuel Macron’s party failed to win a majority in last weekend’s parliamentary elections. Fears of political gridlock are growing as early attempts to form a coalition have faltered. In remarks on Wednesday, Macron said he will seek to establish a working majority in the next few weeks.
Amid an ongoing cost of living crunch, the largest rail strike in more than 30 years is underway in the UK. On Thursday, British Airlines workers at Heathrow Airport also voted to strike.
The Bank of Japan spent the equivalent of $81 billion (a level most analysts see as unsustainable) to buy Japanese government bonds last week in defense of its 0.25% cap in 10-year yields. The cap has resulted in wide interest rate differentials with other sovereign bond markets, leading to a dramatic weakening of the yen.
The results of the Fed’s annual stress test of 34 large banks found that the companies can withstand a severe recession. Collectively, under the severe scenario, the banks would lose more than $600 billion but would be able to continue lending to households and businesses.
UK retail sales declined 0.5% in May from April while June consumer confidence data showed a decline to the lowest level since records began in 1974.
Despite analysts continuing to cut their GDP forecasts, China’s President Xi Jinping pledged this week to “strengthen macro policy adjustment and adopt more effective measures to strive to meet the social and economic development targets for 2022.” China’s growth goal this year is 5.5%.
Consumer prices in Japan rose 2.5% from a year ago in May, exceeding the Bank of Japan’s 2% inflation target. However, no shift in BOJ policy is expected soon, with most of the price rise confined to food and energy. Central bank officials have repeatedly stated that sustained levels of inflation would be needed to shift policy.
British Prime Minister Boris Johnson’s Conservative Party lost two by-elections on Thursday, prompting the resignation of party chair Oliver Dowden.
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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.
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