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23 May 2022
- US Federal Reserve chief Jerome Powell is convinced that the US economy is doing very well, the labour market is very strong, as are retail sales. Consumer balance sheets are healthy, businesses are healthy and the banks are well-capitalized. The economy should therefore be ready for tighter monetary policy. The Fed will therefore not hesitate to go beyond neutral monetary policy, according to Powell.
- The problem is that even the Fed chief himself doesn’t know what is the level of neutral interest rate. Investors are getting nervous at the prospect of rate hikes combined with high inflation and stock market declines and are starting to speculate about the possibility of a recession.
- According to a Bloomberg survey of 37 economists, the probability of an upcoming recession is now around 30%, twice as high as it was three months ago. While a recession is unlikely to be on the agenda this year, a growing number of economists expect a recession in 2023 or 2024 at the latest. However, according to a CNBC survey of small businesses, as many as 8 out of 10 small business owners expect a recession this year. It should be recalled that the last recession in the US was more than 10 years ago, from December 2007 to June 2009. Such a long period between recessions is not normal, although it should be remembered that QE by the US Federal Reserve lasting almost 14 years is also not normal.
Indices
US stocks continued to fall and dipped into bear market territory on Friday but after a late-session reversal, stocks pulled back. Despite the Friday reversal, however, the S&P 500 and Nasdaq posted their seventh consecutive weekly decline (first since 2001), while the DJIA lost for the eighth straight week, for the first time since 1923. The surprise is the subdued activity in the markets with trading volumes more than 10% below the averages of the past 20 days.
Investors continue to be unnerved by rising inflation, which is affecting both corporate profit margins and consumer behavior as they cut back on spending. The results of retailers such as Target, Walmart, Lowe’s and Home Depot were also an unpleasant surprise.
Stocks in Europe took a tumble on fears of slowing economic growth combined with a rate hike, which the ECB will undertake in the second half of the year. The pan-European STOXX Europe 600 index fell 0.55%, Germany’s DAX 40 index fell 0.33%, France’s CAC 40 index lost 1.22% and Britain’s FTSE 100 index lost 0.24%.
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US30 -2.90% |
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US100 -4.45% |
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US500 -3.05% |
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GER40 -0.33% |
Commodities
Oil ended the week with slight gains after a volatile run. The threat of a complete ban on Russian oil imports to the EU played in favour of the price rise. This move has been postponed for now as some countries still disagree with the proposal, but an agreement is close. The lifting of some anti-covid measures in Shanghai could also boost oil demand in China. Fears of a recession, which could be triggered by high inflation combined with rapid rate hikes, are again playing against the price rise.
Gold made its first gains in five weeks, gaining nearly 2% on a weakening dollar and a drop in US Treasury yields. Expectations of extremely aggressive rate hikes in the U.S. may not materialize due to the threat of a recession, leading investors to gravitate towards safe havens such as gold.
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Gold +1.95% |
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Silver +3.22% |
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BRENT +1.22% |
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NATGAS +5.15% |
Forex
The Japanese yen hit its monthly highs. Investors are pulling money out of risky assets amid fears of a slowdown in economic growth and seeking safe havens such as gold or the Japanese yen, which gained on the week despite Japan’s GDP falling 1% in the first quarter. The Bank of Japan is also not considering changing its monetary policy and has doubled down on its massive stimulus program and reinforced a commitment to its super-low yield policy.
The euro strengthened by almost 1.5% during the week after Dutch central bank chief Klaas Knot noted that the ECB should start raising rates in July and that “a logical next step would amount (to) half a percentage point”. François Villeroy de Galhau then admitted that a weak euro could threaten the ECB’s efforts to steer inflation towards its target.
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EUR/USD +1.42% |
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USD/JPY -1.02% |
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GBP/USD +1.88% |
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USD/CAD -0.50% |
Macro
Economic data from the US were mixed last week. Tuesday’s better-than-expected retail sales data from April (March’s data was also revised upwards), and industrial production and manufacturing production were pleasant surprises. However, Thursday’s weekly jobless claims rose more than expected and housing starts and existing home sales were also lower than expected due to rising mortgage rates.
UK inflation rose to 9% in April, the highest level in 40 years, while the unemployment rate fell to its lowest level (3.7%) since 1974 in the first quarter, with new jobs outnumbering the unemployed for the first time in history. Although retail sales unexpectedly rose by 1.4% in April, UK consumer confidence fell to its lowest level in almost 50 years in May.
GDP in the Eurozone did grow at an annualised rate of 5.1% in the first quarter (5% expected, 4Q 2021 4.7%), according to preliminary data. However, the uncertain situation in Ukraine, which is having a significant impact on commodity growth, and renewed disruption to consumer supply chains, have led the European Commission to cut its forecast for 2022 GDP growth to 2.7% from 4.0% and raise its estimate for inflation to 6.1% from 3.5% to reflect higher energy prices.
What to watch out for this week
- Wednesday’s Fed minutes will be eagerly awaited, which could indicate whether the Fed is able to fight the fastest rise in inflation without sending the economy into recession. Fed chief Jerome Powell is confident the Fed can secure a “soft landing” for the economy and will keep raising rates long enough to eventually tame inflation. The FOMC meeting minutes will show how prepared policymakers are for inflation and whether the economy is resilient enough to counter the aggressive approach.
- The data on new home sales is expected to cool due to rising mortgage rates. Wednesday sees the release of the report on durable goods orders, which is expected to rise, as is Thursday’s revised first quarter GDP data. Personal income and spending data will be released on Friday, along with the PCE index, which is a key inflation indicator that the Fed considers when making interest rate decisions.
- In the euro area and the UK, PMI data is due to be published. April’s data in the Eurozone surprised with the end of the covid lockdown and services in particular are expected to see if higher prices will have an impact on consumer behaviour. In the UK, the services PMI is expected to fall due to high inflation. Germany’s Ifo business climate index for May is also expected to fall after a surprise rise in April.
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