HIGHLIGHTS
US stocks tumbled on Friday, completely wiping out the rally from the last two weeks. S&P 500 dropped more than 6%, and Nasdaq went down about 7% in a week. The slump is mainly after May’s consumer-price index exceed economists’ consensus, indicating the inflation has not peaked and Fed’s further tightening policy is possible.
Stagflation: The World Bank has released a report that is pessimistic about the global economy growth in the coming years, expecting that inflation will last for years. The escalating energy and food prices, supply chain disruption and rapid rate hikes are all giving downward pressure to the economy. The president of the World Bank explicitly mentioned that recession is hard to avoid for many countries.
OECD: The upcoming economic slowdown will not lead to stagflation, which contradicted the prediction from the World Bank on Tuesday. Europe is expected to get hit the hardest due to the Russia energy supply disruption. Meanwhile, the surge of food prices is hurting emerging markets the most.
US CPI: US Labor Department data has shown an inflation surged to a 40-year high with a CPI increase of 8.6% on Friday driven by energy and food prices. It may trigger the Federal Reserve to extend its hawkish policy. Core CPI which measures the changes in price excluding food and energy has increased 6% YoY. 2-year treasury yield and dollar rose while stocks closed lower, implying a fully priced in 50bps hikes over the three upcoming Fed’s policy meetings.
ECB: Eurozone interest rate is going to rise for the first time in 11 years. The European Central Bank (ECB) has confirmed an intention to raise interest rate by 0.25% in July to control its surging inflation and downgraded its growth forecast. The ECB's main policy interest rate is currently at -0.50%, and is expected to go back to zero or above at the end of September.
MARKETS
11,832.82 | -7.11% | |
S&P 500 | 3900.85 | -6.09% |
Dow | 31,392.80 | -5.30% |
10-Year | 3.16% | +20bps |
US CPI | 8.6% | +0.3% |
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Fixed Income
Deutsche Bank: There is near zero default in the last 12 months for BB/Bs bonds. The default rate is the lowest for nearly 40 years for the latest rolling 12 months US CCC rated bonds. However, the low default world might come to an end after this year, stemming from recession risk, long lasting inflation risk and the aftermath of pandemic.
Morgan Stanley: Interest rate stabilized last month. Despite the high yield is quite attractive at the moment due to the periodic rally in risky assets, it may not be the best entry time for now. High yield spread might be vulnerable under the negative earnings as well as the profit recessions.
Economy
Goldman Sachs: We forecast the US Core Personal Consumption Expenditures (PCE) will drop to 3.9% by the year end. It is driven by the fall of supply constrained durable goods and peaked housing price. Unemployment rate of US is expected to be 3.5% stemming from the deceleration of growth, especially for cyclically sensitive industries.
REITs
Morgan Stanley: REITs investment can serve as diversification under the negative real interest rates and rising inflation environment, focusing on residential this year.
China
UBS: China is recovering. The policy support has accelerated, including mortgage rate cut and auto tax cut. The delivery time of PMI supplier, chips supply of auto and shipping costs are all showing a positive signal for China’s supply chain.
EU
Goldman Sachs: Core HICP inflation is expected the reach 3.3% given the high energy prices, pressure on wage and weak euro dollar. ECB is expected to deliver the first rate-hike in July because of the inflation pressure, amid sluggish economy growth.
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