Farewell to the turbulent first half of the year

© Reuters. FILE PHOTO: People ride an escalator inside the JP Morgan & Chase Co. building in New York on October 24, 2013. REUTERS/Eric Thayer/File Photo

Anxiety about the risk of a global recession is running high as the midpoint of the year approaches. So economic data and central bank talk will be more in focus than usual, and there’s a lot of that coming.

The European Central Bank will host a forum in Portugal, while a survey of Chinese business activity and a closely followed U.S. inflation gauge will be the data highlights. And Russia could be confirmed default on external sovereign bonds for the first time in a century.

Here’s what Karin Strohecker, Sujata Rao and Dhara Ranasinghe in London, Ira Iosebashvili in New York and Tom Westbrook in Singapore have to say about the market for the week ahead.

1/ Half-year scenario A war of rate hikes, market volatility and fueling runaway inflation is giving way to another half-year…more of the same.

Still, the second half of the year could contain turning points, especially inflation peaks, which could be closer than expected as economic growth slows and oil prices fall.

Could recession signals moderate central bank hawkishness? Markets expect U.S. rates to double to 3.25% to 3.5% by the end of the year and euro zone rates to rise to 0.75% from -0.5%.

Nonetheless, stocks in bear market territory may get a respite. History shows that stocks typically fall before inflation peaks and then bounce back, Goldman Sachs (NYSE: ) noted.

But it also depends on the company’s profits. Earnings growth in the U.S. and Europe is expected to remain double-digit in 2022.

Finally, look at Japan and Turkey, where central banks are dovish in a forest of hawks. The latter risks triggering a serious crisis.

Chart: Central Banks of Advanced Economies Raise Rates (https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoeqgqpx/THEME2306.PNG)

2/ Go to the mountain

The Fed has Jackson Hole, but the ECB has Sintra, its own forum for central banks, located at the foot of the Sintra mountains in Portugal.

The three-day spree starting Monday will be especially interesting given the biggest inflation surge in decades and fears of a looming global recession.

So listen more carefully than usual to what ECB President Christine Lagarde, Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey have to say at the forum. The ECB’s comments will also be scrutinized for any insights on planned anti-fragmentation tools.

Separately, Friday, July 1 will bring the latest Eurozone inflation data, which in turn may determine whether the ECB will implement a larger rate hike after the 25bps hike in July.

Chart: UK US EZ CPI (https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwboqlvo/UK%20US%20Euro%20CPI.PNG)

3/ BREAKING OF TENSION

Four months after the war ended, tensions between Moscow and the West have escalated again. EU leaders formally accepted Ukraine as a candidate for membership in the bloc, a bold geopolitical move sparked by Russia’s invasion of Ukraine.

Meanwhile, Russian gas flows to Europe through Ukraine and the Nord Stream 1 pipeline have declined following the invasion and European sanctions on Moscow. More than a dozen EU countries are affected, and Germany has triggered the “alert phase” of its emergency gas plan.

More worryingly, the standoff in the Russian enclave of Kaliningrad has sparked fresh warnings from Moscow for Baltic EU members.

As the grace period for interest payments on international bonds expires, Russia could slip into sovereign default territory, potentially heralding the country’s biggest external default in more than a century.

Chart: Timeline of major Western sanctions on the Russian bond market (https://fingfx.thomsonreuters.com/gfx/mkt/zdpxoeqwnvx/Pasted%20image%201655988897028.png)

4/ Data, there are many

Federal Reserve Chairman Jerome Powell said the central bank is not trying to create a recession, but is working to contain price pressures, even at the risk of an economic downturn.

A slew of upcoming data should show how the U.S. economy is coping with an aggressive Fed, which has implemented 150 basis points worth of tightening this year, including a 75 basis point move this month.

Highlights included a consumer confidence index for June released on Tuesday, which analysts polled by Reuters expected fell to 100 from 106.4 in May.

Monday’s pending home sales and Tuesday’s Case-Shiller home price index should show how much of an impact higher mortgage rates are having, while May’s personal consumption expenditures price index — the Fed’s inflation gauge — is due on Thursday.

Chart: Consumer Confidence (https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgebwbpb/Pasted%20image%201655938810148.png)

5/ Talk in general terms

China’s June factory activity data released on Thursday may offer a glimmer of hope for sluggish financial markets.

Zero COVID-19 lockdowns and a global economic slowdown are hitting commodity winds, pushing prices in Shanghai’s growth bellwether down nearly 10% in two weeks.

Iron ore is also sliding, with Australia’s red dust miners giving up this year’s gains, dragging down the benchmark stock index there.

This blues may need some piercing. But lockdowns have been eased, and if data show momentum is bringing output into growth territory, it will be a welcome sign for the economy and for those who see Chinese stocks as a safe haven from the stagflation fears that have gripped the West.

Chart: Commodities tumble as China’s recovery stretches (https://fingfx.thomsonreuters.com/gfx/mkt/gkplgebqdvb/Pasted%20image%201655971895821.png)

Source link