A trader works on the floor of the New York Stock Exchange (NYSE) in New York, June 1, 2022.
Brendan McDermid Reuters
LONDON – Global stock markets are falling sharply after information about US inflation in May revived fears that central banks would be forced to tighten monetary policy aggressively.
The long-awaited report on the consumer price index on Friday was hotter than expected by 8.6% a year, reviving market fears that the actions of the Federal Reserve and other central banks could risk turning the economy into recession.
The main average in the United States closed its biggest weekly decline since January on Friday, and futures point to further losses on Wall Street when the opening bell rang on Monday.
Shares in the Asia-Pacific region fell on Monday, with Hong Kong’s Hang Seng index, Japan’s Nikkei 225 and South Korea’s Kospi falling more than 3%. European stocks also fell early in trading, with the pan-European Stoxx 600 falling 2% as a sea of red flooded global risky assets.
Meanwhile, the yield on 2-year US bonds reached its highest level since 2007 on Monday morning and surpassed the 10-year interest rate for the first time since April, an inversion often seen as an indicator of an impending recession.
“Blow in the gut”
Central to the market’s adverse reaction to CPI readings on Friday was fears that inflation expectations have widened and strengthened beyond well-documented ephemeral engines as bottlenecks in the supply chain and energy shocks.
“I think the likelihood of falling into a bear market and indeed a recession has undoubtedly increased as a result of Friday’s gut strike, somehow,” Fahad Kamal, chief investment officer at Kleinwort Hambros, told CNBC on Monday.
Kamal added that there was “very, very little good” in Friday’s inflation report, which he said showed inflation had not peaked and had instead spread across the economy.
“There is less talk about it in sex and the violence of oil and raw material prices and other things, but in fact the rent is very sticky and is a huge part of the index. “There also seems to be an upward momentum there, which suggests that inflation is going to be with us higher and longer than we expected even last week,” he said.
Richard Kelly, head of global strategy at TD Securities, told CNBC on Monday that both bond and stock markets are now signaling that the recession is coming down, most likely in the fourth quarter of 2022 and the first quarter of 2023. d.
“Overall, if you look at stock markets, they tell you that the ISM (US economic activity index) is likely to fall to 50 or below 50 in the next two to three months, and that’s partly what the Fed and central banks need to do. “I’m doing it to get inflation back under control,” Kelly said.
The 50 mark separates the expansion from the contraction in the index of purchasing managers, a reliable indicator of economic activity.
“While the Fed can’t sit there and say it’s their job to stop creating jobs right now, that’s what they need to do if they want to get inflation back under control now,” Kelly added.
All eyes are on the central banks
Next week will be key in the fight against rising inflation for global central banks and markets.
Federal Reserve officials will meet on Tuesday and Wednesday to discuss their next monetary policy move. The Federal Open Market Committee is expected to announce an increase of at least 50 basis points on Wednesday, after raising interest rates twice this year, although market bets on an increase of 75 basis points rose in light of CPI data on Friday.
The Monetary Policy Committee of the Bank of England will announce its latest decision on interest rates on Thursday, while the Bank of Japan, the Swiss National Bank and the Brazilian BCB are also meeting this week.
Investors will also learn a wealth of data on economic activity, including Chinese industrial production and retail sales, industrial production in the United Kingdom, employment and retail sales, and US producer price inflation, retail sales and industrial production.
The UK’s GDP contracted by 0.3% a month in April, official data on Monday showed, which did not meet economists’ expectations for 0.1% expansion and heightened fears of economic slowdown ahead of the decision of the Bank of England on Thursday.
In general, the flow of data will be combed for recession signals, with the added irony that any signs of activity will likely be a case of “good news” being bad (ie putting extra pressure). to raise interest rate expectations), while the pressure on central banks is to maintain some semblance of control over interest rate trajectory narratives, even though it has proved hopelessly wrong in terms of inflation, “said Mark Ostwald, chief economist and global strategist. at ADM Investor Services International.
What about investors now?
Kelly suggested that markets have become complacent in the hope that a slowdown in core inflation will signal that central banks have caught up with rising prices. He said Friday’s data signaled how far behind the curve the Federal Reserve remained and how likely inflation would be.
The US dollar strengthened once again on Monday as investors sought the traditional safe haven, which has led to a rise in greenbacks against most world currencies. Kelly stressed that TD Securities holds long positions for the dollar against the euro and the Canadian dollar.
“You see where interest rates and pricing are going, you look at the differences in equity, and that tells you to be long dollars,” he said.
“It’s something that expands here and then just goes back to the cycle of financial conditions in terms of that tightening, which then goes back to growth and the risk side in terms of what the market wants to value in stocks and loans. . “
On the stock front, Kamal said that while there is no “perfect hedge” against both inflation and the recession, there are steps investors can take to withstand the storm. Kleinwort Hambros continues to have significant monetary weight and seeks to place it in fundamentally strong, long-term holdings when “attractive prices” are reached, he explained.
“There is no denying that there will be many precious stones in this whole ruin. We have increased the distribution of goods … we may be looking to add to that, as goods are obviously an area that is relatively good at protecting you from inflation over the long term, “Kamal said.
If you are in the stock market, it is really difficult to avoid the energy sector at the moment, because there is obviously a huge structural shortage of oil and gas, and energy stocks are still cheap, believe it or not, despite the thunderous growth – and there are still place of application for this sector. “
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