The higher-than-expected US CPI data has completely killed the “Fed pause” bets that had boosted the short-lived market rebounding. The US short-dated bond yields surged above those in the long-dated bonds, with the US 5-year and 30-year bond yields back to inversion, again flagging an economic recession alert. But it is worth noting that historically, a recession usually happens 18- 24 months after the inversion occurs and is followed by negative GDP growth and falls in inflation. This signals the Fed must “front load” rate hikes to ease inflationary pressure at a cost of economic growth. It might be hard to achieve a “soft landing” if this is what happens.
With the wide expectation of a 50-basis points rate hike by the Fed this week, any softening tone from the Chairman, Jerome Powell, could be seen as a positive sign in the extreme fear sentiment, though the bond markets are now pricing in a supersized rate hike of 75 basis points.
In China, both Beijing and Shanghai restarted mess testing for Covid-19 in some areas, with Shanghai locking down part of the city again, adding to the fear factors of the bear markets. However, Asian equity markets have been outperforming the US and EU peers in the last three months, with devaluation in both the Japanese Yen and Chinese Yuan buoying both countries’ equities, which may become alternative flows of the investment funds.
- Are there any chances for oil prices to continue moderate? Despite a 3-month high in the crude price, the oil markets eased surging last week due to the reignition of recession fears and China’s partial lockdowns. See the oil prices
- The US equities are not bottoming yet for sure, with S&P 500 approaching the year-low again. Will the Fed’s dot-plot projection provide any positive hints? Monitoring the SPX movements
- Australian equities have finished terribly last week, taking a hard hit by the RBA’s supersized rate hikes. From a technical perspective, the ASX 200 may continue the downtrend, heading to an 18-month low. See the Australia 200 trend
- The USD/JPY has hit a fresh 20-year high as US 10-year bond yields continue to surge. There are few chances for the BOJ to provide a cap of the pair this week. See the USD/JPY rate
- Cryptocurrencies were hammered to the edge, with Ethereum heading to the lowest level seen in March 2021. Wil the financial market’s turbulence send the digital assets back to their pre-pandemic levels? See the cryptocurrencies movements
Key economic data and events (June 13 – June 19)
China retail sales (May) – Wednesday
The Chinese economy was badly hit by the strict Covid-lockdowns in April when the retail data shrank by 11.1% year on year. It is expected to rapidly recover since, with an expectation of 0.5% growth in May. The industry output is also forecasted to improve to -0.1% in May from -2.9% the prior month.
FOMC meeting - Thursday
As previously projected, Fed will increase interest rates by another 50 basis points, to 1.5% on Thursday, and a 50 bps increase in July, to 2%. The reserve bank will also kick off reducing its balance sheet by US$47.5 billion, or “QT” from this week, aiming to increase the size to US$95 billion per month by September. The futures markets have priced in a 50 bps of rate hike in each of the next meetings, leading the benchmark rate to 3.5% by the year-end, according to Bloomberg. The Fed’s dot plot chart will be a key focus to gauge the future funds' rate path.
The US PPI data and retail sales for May will be released on Tuesday and Wednesday respectively, which are the key economic indicators to gauge the cost of goods that have been made, and consumer demands, providing clues to the inflation trajectory. According to Thomson Reuters, consensus calls for an elevated PPI of 0.8% in May vs. 0.5% in April. Retail sales are expected to fall to 0.2% in May from 0.9% in April, signaling that the rising cost of living may start softening demands.
Australia employment (May) – Thursday
Another strong data of Australian employment is expected for May, a 25,000 new jobs adding is in the forecast, which is not good news for the local equities and currencies. Currently, the central banks become highly aggressive in rate hikes, making strong economic data bad news for the risk assets.
New Zealand GDP (Q1) – Thursday
Consensus calls for a slowdown in the first quarter of the New Zealand GDP growth, with 5.3% y/y vs. 5.6% the prior quarter, and 0.6% q/q, vs. 3% in Q4 due to the omicron outbreak. But it is a lagging indicator for the economy which should have recovered since April when the country lifted the Covid alert level to orange.
BOJ policy meeting
There are no expectations for the Bank of Japan to change its guidance for controlling the government bond yields curve by keeping the JGB 10-year yield under 0.25%, though the Japanese CPI has now just reached the inflation target rate of above 2%. Any hints of less dovish rhetoric from the BOJ will certainly put a cap on the surge of USD/JPY. However, the chance is low in this meeting.
BOE policy meeting – Thursday
The Bank of England is highly expected to raise the interest rate by another 25 basis points, to 1.25% in the upcoming meeting as the UK inflation soared to 9% in April, despite a recession warning by the central bank. The country’s economy stalls due to the war-sparked energy crisis and flaring consumer prices, making it the bank hardly to roll out a 50 bps hike.
Europe Week Ahead
- UK average earnings (April)
- JD Sports full-year
- Tesco Q1 results