Another market bounce back has been squashed as quickly as it surfaced. S&P 500 dropped 20.6% in the first half of the year, marked as the worst first half in 50 years. Both stocks and bonds tumbled this week as investors are still worried about the rising possibilities of recession from the federal reserve’s fight against inflation. Eurozone CPI hit an all-time high at 8.6% in June, which is also higher than expected. US PMI data in June fell to a 2-year low amid the contraction in the economy.
Central Bankers: J-Pow said there is no guarantee that the inflation fight will not affect employment. ECB’s President Christine Lagarde said that we are not going back to the low inflation environment, implying potential turbulence of monetary policy.
US Bond: The US treasury yields fell and shifted to price in a half-point cut after the Fed reached its peak at some point in 2023 as traders put their bets on a US recession eventually stopping the central bank’s aggressive tightening. Investors are encouraged to sell off their risky assets and seek sanctuary in the safety of government bonds. The 2-year and 10-year treasury notes fell to 2.84% and 2.89% respectively.
US Consumer Pullback: The personal consumer expenditures price (PCE) index in May is suggesting consumers were also pulling back. Adjusted for inflation, purchases dropped 0.4% driven by a 1.6% drop in goods purchases; but much of the increase was driven by spending on housing and health care. Thanks to the PCE data, the Atlanta Fed’s GDPNow model has now pushed down its estimated annualized growth in Q2 to -1% which suggests a rescission(*), given a -1.6% in Q1.
(*): 2 consecutive quarters of negative growth is a commonly accepted definition of recession.
China Reopen: China's COVID cases remain steady and Xi is still vowing to stick with the Zero COVID policy. Shanghai recorded 0 local case and 1 case in Beijing. Tourists, attractions, and restaurants are reopened in both major cities. Reopening theme stocks pumped up, such as consumer staples.
PBoC: More monetary policies will roll out to aid economy, aiming to stabilize employment and consumer prices. SME inclusive loan support is raised.
HK Consumer: Hong Kong Retail sales unexpectedly dropped in May after a brief rebound from COVID outbreak earlier this year. Sales value declined 1.7% in May from a year ago released on Thursday. This was way below the estimate of an 8.4% rise expectation.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Barclays: Although there was a material pullback in equity valuation, it is still too soon to consider it as bottom and bet on rebound of risk assets. Some downside risks have not been priced in yet.
J.P. Morgan: As the economy is expanding most of the time, it is critical to be well-positioned for expansion if you are a long-term investor, rather than trying to trade around recession tactically.
Morgan Stanley: The bear market bottom may still be 5-10% away. S&P500 profit fell 57% during 2007-2008 and 32% during 2000-2001. The current cycle excesses are driven by liquidity that fueled speculation in various assets like crypto, VC, SPAC, and some unprofitable tech companies. Besides, the forward S&P500 earnings growth rate has slowed down due to rate hikes. We cannot see a buyable bottom to this bear market until expectations are recalibrated and policy intensity stabilizes.
Morgan Stanley: Investment Grade (IG) bond prices reach the lowest level since 2009, stemming from rising Treasury rates and widening credit spreads. The comeback in equity volatility and the higher recession risk have dragged down the spread widening speed, especially in high yield.
Goldman Sachs: Volatility remains high amid hawkish policy, high inflation and slow growth environment. European sovereign bonds rallied due to the weak flash PMI data, supporting the USD. We expect a compression in bond values with negative yield is led by the normalization of policy.
J.P. Morgan: Consumer sentiment is at record low while June flash PMI performed worse than expected, the impact of high commodity prices and interest rate is starting to turn up. However, job market data does not support this statement as initial jobless claims are staying at a low level.
Morgan Stanley: The aggressive tightening has doubled the likelihood of recession. This recession is driven by inflation, not credit. Thus, it would be shallower than the past recessions because of 1) No credit bubbles 2) Strong balance sheet in financial institutions, corporates and households 3) Strong labor market 4) Low inventories level in vulnerable industries, including housing and autos.
UBS: US dollar is depreciating against the Swiss franc, which is our recommended safe-haven currency for now. Besides, we are optimistic about commodity-linked currencies, such as CAD and AUD.
Deutsche Bank: High commodity prices and rising interest rates are giving pressure on the developers. Many projects are forced to be delayed, causing a subdued supply. Meanwhile, the demand is booming due to the increasing net immigration contributing from the Ukrainian refugees. The supply shortage is going to at least persist until 2023.
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