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13 June 2022
- Gasoline is one of the indicators of the functioning of the economy in the US. It affects not only transport and travel, but also the manufacturing and construction sectors, consumer behaviour, and last but not least, inflation expectations.
- And gasoline prices are also part of one indicator that tracks the health of the US economy. According to this indicator, the economy might run into trouble when interest rates and energy prices reach double digits. So when the average interest rate on 30-year mortgages (which reached 5.23% last week) is added to the price of gasoline (which has exceeded $5 a gallon), we get above 10.
- According to Moody’s Analytics Chief Economist Mark Zandi, an oil price of around $150 per barrel could push the price of gasoline to $5.50 to $6, which could be a big problem for the economy. Add the high pace of interest rate hikes by the central bank, which in recent years has also often been linked to the next recession, and the US economy might be heading into big trouble. And Treasury Secretary Janet Yellen’s statement that she sees no signs of an impending recession is unlikely to change that.
Indices
US stocks have had one of their worst weeks since the start of the year. The beginning of the week was relatively calm, and volatility was kept in check. However, the selloff on Thursday afternoon and Friday’s inflation data have reassured investors that the Fed’s rapid rate hikes will continue. That risk is weighing most heavily on growth stocks and titles in the technology sector, which have taken the most significant losses.
European stock markets were also affected by central bank actions. After its meeting on Thursday, the ECB suggested that it is likely to accelerate its plan to raise interest rates and end QE, to which stocks reacted with a significant fall. The pan-European STOXX Europe 600 Index ended 3.95% lower, Germany’s DAX pulled back 4.83%, France’s CAC 40 Index lost 4.60%, and The UK’s FTSE 100 Index slid 2.86%.
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US30 -4.58% |
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US100 -5.70% |
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US500 -5.05% |
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GER40 -4.83% |
Commodities
Gold began to reemerge as a hedge against inflation during the week, reaching its 4-Week Highs on Friday. The gold price did stagnate during the week, and Friday’s inflation data sent the price to weekly lows, but after an inversion in the 5-year and 30-year bond yields, again raising recession fears, gold got a boost and strengthened to $1,875 per ounce.
Further developments in the commodities market will be determined by the situation in Ukraine as well as the change in demand in China. There could be a recovery in demand following the easing of restrictive measures related to the coronavirus. On the other hand, there is a risk of weaker export demand and sluggish construction activity, which could keep commodity demand subdued.
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Gold +1.09% |
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Silver -0.18% |
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BRENT +1.91% |
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NATGAS +3.84% |
Forex
The Bank of Japan still maintains an extremely loose monetary policy and, according to its own words, has no plans to change it, which is why today, the Japanese yen is at 20-year lows against the US dollar and continues its steep decline. After another weekly drop to historic lows, economists are speculating about the possibility of the central bank intervening against a significant depreciation to prevent the weak currency from hurting the economy. Still, it is not that simple, as such actions must be coordinated among the G7 countries.
The Turkish lira is also losing significantly this year and has already lost a quarter of its value. Investors are worried about another currency crisis as inflation is rising rapidly in the country, and the central bank is reluctant to move to more drastic rate hikes. The country is considered one of the riskiest emerging markets, and sharp fluctuations in its currency are not uncommon.
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EUR/USD -1.93% |
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USD/JPY +2.73% |
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GBP/USD -1.44% |
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USD/CAD +1.52% |
Macro
Thursday’s new claims for unemployment benefits, which rose above expectations and hit their highest levels since January, suggested that the US labour market is loosening. However, the main news of the week was not until Friday, when inflation data was released. On a year-over-year basis, investors and traders were surprised to see inflation rise to 8.6% in May from 8.3% in April. On a monthly basis, inflation rose to 1% in May from 0.3% in April, while markets had expected a rise to 0.7%. Meanwhile, markets were mostly expecting growth to start slowing. Core inflation, excluding food and energy prices, rose 6% YoY after April’s 6.2%, but markets expected growth to slow to 5.9%. Thus, the Fed will likely continue to raise interest rates by 0.5% at other meetings in the second half of this year.
The ECB also surprised markets with its more dovish comments. It was widely expected to start raising rates in July, but if the medium-term inflation outlook were to deteriorate further, the ECB might proceed to raise rates by more than the classic 0.25%. The ECB also lowered its economic growth outlook and, in turn, increased its projection for inflation. GDP is expected to grow by 2.6% in 2022 (the previous forecast of 3.7%), then slow to 2.1% in 2023 and 2024. Inflation growth should accelerate to 6.2% in 2022 but slow to 3.5% in 2023 and 2.1% in 2024.
What to watch out for this week
- Next week’s US Fed meeting on Wednesday, where a 0.5% rate hike is expected, will have a primary say. Further hikes of the same magnitude are also expected in July and September, with Friday’s inflation sparking speculation of a more aggressive Fed approach. Thus, in addition to the rate-setting, the press conference will also be critical, where we will hear the economic forecasts and the “dot plot”, which can be a guide for further interest rate predictions.
- Rates will also be decided on Thursday by the Bank of England, which is also expected to raise interest rates for the fifth consecutive time. Despite the ECB and Fed considering raising rates by 0.5% and UK inflation hitting a forty-year high of 9% in April, the BoE is still raising rates by 0.25%. While the bank was the first to start tightening monetary policy, inflation may still hit the 10% mark by the end of the year. And according to Governor Andrew Bailey, the central bank still has to decide between rising inflation and the possibility of triggering a recession.
- Monetary policy will also be decided on Friday by the Bank of Japan, which is expected to continue its ultra-easy monetary policy. The BoJ has so far not been forced to change even by the significant depreciation of the Japanese yen, which is at multi-year lows, as the country has been fighting deflation for a long time, and some inflation has been good for it so far.
- Also, the Swiss central bank is still maintaining a very loose monetary policy and rates are at a record -0.75%. However, with the country’s inflation at 14-year highs, there could be a change in the SNB’s stance soon.
- In the US, in addition to rates, there will be some interesting data released during the week. On Tuesday, it will be producer inflation, which may provide clues as to how consumer prices will move in the future. On Wednesday, it will be retail sales, whose decline should be driven mainly by weak auto sales. On Thursday, we will see statistics on housing starts and building permits; on Friday, we will see data on industrial production.
- In Europe, Germany’s ZEW Economic Sentiment Index and Friday’s Eurozone inflation numbers will be of interest.
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