Global markets tumble ahead of huge week for central banks

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City on June 1, 2022.

Brendan McDermid | Reuters

LONDON — Global stock markets are down sharply after May’s US inflation figures rekindled fears that central banks will be forced into aggressive monetary policy tightening.

Friday’s highly anticipated consumer price index report came in hotter than expected at 8.6% a year, reigniting market concerns that action by the Federal Reserve and other central banks could risk tipping the economy into recession.

Major averages in the United States closed their biggest weekly declines since January on Friday, and futures are pointing to further losses on Wall Street when the opening bell rings on Monday.

Asia-Pacific stocks plunged on Monday, with Hong Kong’s Hang Seng index, Japan’s Nikkei 225 and South Korea’s Kospi all falling more than 3%.

European stocks also fell in early trading, with the pan-European Stoxx 600 losing 2% as a sea of ​​red swept across global risk assets.

Meanwhile, the 2-year US Treasury rate hit its highest level since 2007 on Monday morning and edged closer to a reversal with the benchmark 10-year rate – seen by many as a sign of a recession. imminent.

‘Punch in the stomach’

At the heart of the market’s adverse reaction to Friday’s CPI reading is concern that inflation expectations have widened and become entrenched, beyond well-documented ephemeral factors such as bottlenecks. supply chain and energy shocks.

“I think the likelihood of falling into a bear market and even into a recession has definitely increased as a result of Friday’s punch, in a way,” Fahad Kamal, chief investment officer at Kleinwort, told CNBC on Monday. Hambros.

Kamal added that there was “very, very little good” in Friday’s inflation report, which he said indicated inflation had not peaked and had instead widened to the bottom. whole economy.

“It’s less talked about in the sex and violence of oil and commodity prices and other things, but actually the rent is very sticky and that’s a huge part of the index. There seems to be also an upward momentum, which implies that inflation is going to be with us higher and longer than expected even last week,” he said.

Richard Kelly, head of global strategy at TD Securities, told CNBC on Monday that bond and equity markets are now signaling that a recession is coming, most likely in the fourth quarter of 2022 and the first quarter of 2023.

“Overall, if you look at the stock markets, they’re telling you that the ISM (US economic activity index) is likely to fall to 50 or sub-50 over the next two to three months, and that’s in part of what the Fed and central banks are doing to get inflation under control,” Kelly said.

The 50 mark separates expansion from contraction in a purchasing managers index, a reliable indicator of economic activity.

“While (the Fed) can’t just sit there and say its job is to end job creation right now, that’s essentially what it needs to do if it wants to get inflation under control now.” , Kelly added.

All eyes on central banks

The coming week will be crucial in the fight against soaring inflation for central banks and global markets.

Federal Reserve officials will meet Tuesday and Wednesday to discuss their next monetary policy decision. The Federal Open Market Committee is expected to announce a hike of at least 50 basis points on Wednesday, after already raising rates twice this year, although market bets for a 75 basis point hike have risen in light of the Friday’s CPI figure.

The Bank of England’s monetary policy committee will announce its latest interest rate decision on Thursday, while the Bank of Japan, Swiss National Bank and Brazil’s BCB will also meet this week.

Investors will also assimilate a wealth of data on economic activity, including industrial production and retail sales in China, industrial production, employment and retail sales in the UK, and price inflation. production, retail sales and industrial production in the United States.

UK GDP shrank 0.3% month on month in April, official figures showed on Monday, falling short of economists’ expectations for a 0.1% expansion and bolstering fears of an economic slowdown before the Bank of England’s decision on Thursday.

“In broad terms, the data series will be combed through for signals of recession, with the added irony that any signs of strength in activity are likely to be a case of ‘good news’ bad (i.e. ‘that is, to put additional upward pressure on rate expectations), while the pressure on central banks is to retain some semblance of control over rate path narratives, albeit they turned out hopelessly wrong on inflation,” said Marc Ostwald, chief economist and global strategist at ADM Investor Services International.

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