27 June – 1 July 2022
The pendulum of market sentiment swings dramatically. It has swung from nearly everyone and their sister complaining that the Federal Reserve was lagging behind the surge in prices to fear of a recession. On June 15, at the conclusion of the last FOMC meeting, the swaps market priced in a 4.60% terminal Fed funds rate. That seemed like a stretch, given the headwinds the economy faces that include fiscal policy and an energy and food price shock on top of monetary policy tightening. It is now seen closer to 3.5%. It is lower now than it was on when the FOMC meeting concluded on May 4 with a 50 bp hike.
Investors will likely be split into two camps in the coming trading week. The optimists will no doubt focus on a continued market rebound, pointing to the S&P 500 which regained 5% last week; the Dow Jones which recouped 4%; the Russell 2000 which recovered 7% last week; and the NASDAQ which jumped 8.8%.
The pessimists, however, will keep paying attention to the fact that the US major equity indices have just gone through the worst first half of a year in over half a century. The SPX lost almost 18% of its value since the start of 2022 while the Dow is down 13% over the same period; the tech-heavy NASDAQ 100 has been gutted since the start of the year, having declined by 25.6%; and at the same time the small-cap Russell dropped by 21.4%.
Wall Street will continue to focus on the strength of the US consumer and pay close attention to personal income/spending data, another set of inflation readings, and a few key corporate earnings from the major retailers.
Fed watchers will get more comments from Chair Powell as he attends the ECB Forum on Central Banking. Fed’s Daly, Mester and Bullard also have scheduled appearances.
President Biden will also attend the G-7 summit, which could contain new measures aimed at easing the global food and energy crisis.
A busy week for Christine Lagarde as she welcomes peers to the ECB Forum on Central Banking in Portugal. President Lagarde will make appearances throughout the week and traders will no doubt be clinging to her every word.
Flash inflation data on Friday is another highlight. Traders are already pricing in a 25 basis point hike in July, then at least a couple of 50 basis points thereafter. There’s clearly room for more after a late start by the ECB and the June inflation data could be the catalyst for a super-sized lift-off next month
The BoE has been reluctant to super-size its rate hikes for fear of deepening the economic slump. But with more and more central banks moving in that direction, the MPC could be tempted soon. Perhaps Bailey will drop such hints on Wednesday.
China releases industrial profits on Monday but most attention will be on official PMIs on Thursday, and Caixin PMIs on Friday. The data should show a rebound in both manufacturing and services following the Shanghai and Beijing reopenings. Weaker numbers will prompt slowdown fears and prompt the selling of China equities.
India’s balance of payments and PMIs on Friday have downside risks thanks to the wheat export ban, droughts, stress in the electricity sector and a weak rupee. That could prompt more INR selling with it remaining near record lows this week despite US dollar strength fading internationally.
Source : investing.com