US major indices rebounded on Friday. S&P500 and Nasdaq surged about 3% and 3.5% respectively. Fed Chairman Powell warned that steep rate increases could trigger a downturn and would be challenging to achieve a soft landing on the Senate Testimony on Wednesday. The market rebounded accordingly as investors found relief that Fed will actually consider the recession likelihood when they launch policies to control inflation.
China: President Xi vowed to meet the annual economic target. China is planning to issue more local government bonds for supporting infrastructure projects and new energy. He also mentioned the promotion of healthy development in the fintech areas. On the other hand, PBoC announced that they are not going to over-print money, implying massive stimulus is less likely to happen.
Gasoline Tax: As summer driving season is coming, gasoline demand is expected to surge. To cool down the pumping price, Biden proposed to back the suspension of the 18.4% gasoline tax, while the democratic leaders are skeptical about the effectiveness of the plan as altering taxes could only transfer the cost of higher energy prices into the future.
Housing: US mortgage rate spiked to almost 6% last week, the highest in 15 years. Existing home sales declined to a 2-year low while new home sales unexpectedly rose to 10.7%. It is likely to be a temporary pump as a high mortgage rate is reducing affordability and cooling demand in the housing market.
UK Inflation: Inflation in the UK rose to a 40-year high of 9.1% after the increase in the cost of energy and food. BoE has already announced five consecutive interest rate hikes to 1.25% while the markets are betting rates will double and hit 3% by year-end. Data released on Friday has shown that UK retail sales dropped 0.5% in May as consumers struggled with soaring prices. Gilts(*) rallied as May’s inflation data matched expectations. Recession risk is also limiting the extent of the tightening policy of BoE. Traders pared their wagers on three more times 50bps hikes by BoE.
(*)Gilts is sterling-denominated UK Government bonds.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
J.P. Morgan: Stock market has been under pressure and was pushed further down due to overtighten policy and recession risks. It is critical to endure the pain in the bear market to achieve long-term returns. Investors could keep an eye on defensive equities sectors.
Morgan Stanley: Although the market is closely discounting a recession, we still expect a peak in inflation and Fed policy by the end of this year. Investors are suggested to diversify their portfolio, namely IG bonds, international ETFs, and selective Small-Mid cap stocks. Sectors like biotech, financial, energy, industrial, and homebuilders are highlighted.
Citi: As the global supply shock drives inflation higher and economic growth lower, the probability of recession is reaching 50%. Unemployment is expected to rise a few percentage points when recession occurs.
Bank of America: Our card data shows that services spending is growing while goods spending is slowing. Overall spending continues to increase. Spending pattern is returning to normal as the wide gap between goods and services spending has almost converged. The median of checking and savings account balances are higher than pre-COVID level which is partially contributed by the gain in wage.
J.P. Morgan: Labour market is expected to be dragged by the aggressive actions of the Fed, implying about 800,000 fewer Americans on payrolls by 2024. While whether inflation has peaked is controversial, data shows that inflation and unemployment exhibit an inverse relationship, and inflation usually peaks before unemployment reaches its bottom.
Morgan Stanley: The most econometric models forecast that the probability of recession has risen from 30% to 60%. Based on the Fed’s suggestion of continuing hawkish policy, the implied rate could hit 3% by the end of the year. This figure is beyond the expectation of most economists and the Fed’s previous forecast, giving more pressure on growth and increasing recession risk.
Goldman Sachs: Oil prices continue to be volatile due to the worries on the supply side, including US sanctions on Iran, potential new EU sanctions on Russia, and consideration of US’s export limit.
Morgan Stanley: Historically, commodities prices were negatively correlated with the US dollar. The relationship is broken due to the supply shocks of pandemic and Russia conflict. The effect of Fed's tightening may be neutralized if recession crashes commodities and takes the dollar with it, which leads us to stagflation.
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