Equity markets were up last week as risk assets jumped from their June lows and equity markets staged a mid-summer rally. US inflation numbers offered a positive surprise with July CPI numbers beating expectations and headline CPI falling on annual basis from 9.0% to 8.5% and core inflation rate dropped
to 5.9%. Having said that, equity markets are not out of the woods yet, with Seth Carpenter, chief global economist at Morgan Stanley seeing a “gathering storm cloud of a global recession” in his Sunday market note. US economy is in what is elsewhere classified as a recession but what US President Joe Biden and the Fed term as a “technical recession”- two quarters of negative GDP growth. Business investment, real estate numbers and construction have fallen but US job creation numbers are positive. Morgan Stanley takes a bearish view, particularly for Europe, where flow of natural gas from Russia is disrupted, prices have surged and there are expectations of weak growth through the end of the year. Euro area PMI data for July is already negative.
We would look ahead this week for the release of Fed’s minutes to have a better view of the Fed’s rate hike policy going forward. In his July address, Powell noted that’s the Fed’s strategy is to slow the economy enough that inflation pressures abate and then pivot.
China posted negative Q2 results amid lockdowns linked to the coronavirus and a worsening property slump. China’s central bank unexpectedly cut key policy interest rates with its medium-term lending to 2.75% for its first reduction since January, as retail sales, industrial output and investment all slowed and missed economists’ estimates in July. It is unclear if this move will have the desired effect as the property sector and Covid-19 outbreaks still weigh on consumer and business activity.
Commodities, FX and Bonds
Crude priced fell on Monday following expectations of weaker oil demand from China after the release of weak economic data. This is a double whammy as on the supply side, Saudi Arabia’s Aramco confirmed over the weekend that it was on track to expand output by 1 million barrels a day by 2027 to bring
its total crude oil production to 13 million barrels a day. The largest exporter will increase production while the largest importer is showing weaker demand. A revived Iran nuclear deal could also lead to more Iranian oil on the market- about 1 million barrels a day. US demand is also likely to weaken as slowing US growth could hurt demand from manufacturers and motorists. On the currency front, the CHF is gaining strength against the EUR and most international currencies due to several factors: dynamic companies, moderate inflation, controlled public debt and surplus trade balance. In its next meeting on 22nd September, the Swiss National bank is expected to raise key rates by another 25-50 bps echoing the anticipated move by the ECB on 8th September. – the impact on CHF/EUR will be very small.
Please find full weekly note below: