highlights
- Markets sunk with all major indices reporting at least 4.7% down for the week.
- The Energy sector was the worst performer with oil down below $100 a barrel and the energy sector down 17.1%.
- The Federal Reserve voted 10 -1 to raise the reserve lending rate 75 bps during Wednesday’s session. The Fed also revised their growth and unemployment outlook to less optimistic forecasts.
- Risk on assets such as Bitcoin dropped 29% and hedge funds are positioning conservatively and are keeping leverage low.
- University of Michigan consumer sentiment June reading lowest ever.
- Bloomberg world index dropped 5.6% and the Euro STOXX index dropped 4.6% in response to US FED hike.
- President Macron of France lost assembly majority making it difficult for him to pass reforms.
- 25% of European companies are considering shifting investments outside of China due to knock on effects from lockdowns and restrictions.
U.S.
The fed announced an aggressive 75bps hike on Wednesday, which initially lifted markets on a more hawkish Fed expectation. However, the markets soured later in the week to end with the S&P posting its worst weekly performance since the pandemic with a 5.7% down move. The Russell 2000 was the worst performer at 7.4% with all major indices down at least 4.7%. The Fed’s released guidance was more hawkish in response to the CPI print with estimated higher rates and slower growth. Fed driven “Risk off” sentiment reverberated through major asset classes, including the currency and the crypto market. WTI plunged 10.4% with oil prices back below $100/barrel and the dollar continued to strengthen. Policy makers now see PCE inflation rising to 5.2% this year, up from their previous forecast of 4.3%.
THE FED RAISES RATES 75BPS TO COMBAT INFLATION
The Fed is being forced to increase the speed and aggressiveness of its rate hiking campaign with its most recent hike announced this past Wednesday. This follows a hotter-than-expected CPI print. Without clear evidence that core CPI has begun to roll over, the Fed has few options in its arsenal to engineer a soft landing. Jerome Powell stated after last Wednesday’s FOMC meeting, “We’re not trying to induce a recession now. Let’s be clear about that.” Unfortunately, monetary tightening appears to have more impact on the demand side than on the supply side. From the Fed expectation dot plots, we can see that the baseline prospects for growth have been decreased to lower than 2.0% for years 2022-2024 and the necessary rate hike increases to achieve the Fed’s objective have been increased. These hikes and changes in sentiment have caused markets to price in close 4.0% Fed funds rate by year-end.
JOB MARKET
Unemployment continues to remain at record lows with twice as many job openings as those currently unemployed according to the most recent Bureau of Labor Statistics reporting. Unemployment is currently at 3.6% representing a return the second lowest unemployment print since 1970 (unemployment was 3.5% in February of 2020). With the most recent Fed announcement, policy makers increased their inflation targets to 3.7% in 2022, 3.9% in 2023, and 4.1% in 2024 respectively. This revision implies that the fed expects 800,000 fewer Americans on payrolls by the end of 2024. The Chief Executive Magazine CEO survey that measures the CEO confidence in the economy one year from now is down to the lowest level since 2013. Corporate high yield spreads are rising as balance sheet quality returns in focus for bond holders.
SHORTENED WEEK
Markets were closed on Monday for the Juneteenth National Independence Day Holiday.
Earnings remain slow, with only a few notable reports from larger names. In the U.S. economic calendar, we get data readings on:
- Existing Home Sales Tuesday; Current Account, Initial Claims
- Manufacturing/Services PMI on Thursday
- June’s final Michigan Sentiment reading and New Home Sales Friday
International
The Bloomberg World index dropped 5.62% last week, with growth down 5.42% and value down 6.35%. The 75bps rate hike from the Fed sent a hawkish signal to global markets. The Euro STOXX index dropped 4.61% last week, with retail down 8.2% and technology down 6.44%. Insurance was the best relative performer, only down 0.58%. The Dollar index remains strong around the 104 level, adding pressure to emerging markets currencies. Brent oil declined 7.29% last week, from $122 to $113.
Europe
In France, President Emmanuel Macron lost assembly majority in legislative elections as far right and far left gained more seats than expected. In fact, Macron’s alliance needed 289 seats to secure majority but was only able to get 245 seats. A new left-wing alliance led by Jean Luc Melenchon gained 131 seats, becoming the first opposition party of the country. Marine Le Pen’s party secured 89 seats which was above expectations. This new legislative balance of power should make it difficult for Macron to pass reforms. The CAC index declined 4.92% last week.
In the United Kingdom, Bank of England (BOE) raised interest rates by 25bps for the fifth straight meeting and warned that a bigger hike could be on the table if inflation persists. Policy makers now forecast in their base case scenario double-digit inflation in November when energy bills are set to surge again. UK consumer confidence hit an all-time low last month as purchasing power keeps shrinking. Last month, Britain announced a 25% windfall tax on oil and gas producers’ profits as well as a $18 billion support package for households hardly hit by energy bills. The FTSE 100 index dropped 4.12% last week.
APAC
In China, the Covid-zero policy is leading European companies to reconsider future investments in the region. According to the latest survey from the European Chamber of Commerce in China, 25% of European companies surveyed are considering shifting their investments outside of China due to the economic impact of lockdowns and restrictions. The survey reports that 7% are reviewing Chinese investments in their pipeline due to the geopolitical tensions stemming from the Russia/Ukraine war. Chinese corporate bond yields are rising as investors’ enthusiasm cools off. The Shanghai Composite gained 0.97% last week.
In Japan, the USD/JPY climbed above 136, which is the highest level since the late 1990s. Bank of Japan (BOJ) continues to buy bonds aggressively and is on track to become the first major Central Bank that owns over half of the treasury bond market. Last week, the BOJ purchased $81 billion worth of government bonds to cap yields. Inflation is finally coming to life in Japan with a nationwide CPI print of 2.5% last month. Soaring oil prices are complicating the picture for policy makers, as mineral fuels represent close to 25% of imports. The Nikkei 225 index declined 6.65% last week.
Emerging Markets
In Brazil, policy makers raised interest rates by 50bps to 13.25% last week and signaled that another hike may be needed amid high inflation. The Central Bank of Brazil expects the effect of its tightening policy to weigh on the economy in the second half of year. Analysts expect another 50bps hike in August. Brazil is the only major Latin American country with positive real rates as Central Bankers raised rates at a faster pace than their peers. Bloomberg Economics expect rates to peak at 13.75% and remain in double-digit territory throughout 2023. Brazilian stocks dropped 5.36% last week.
In Colombia, the Colombian Peso slid 4.9% after leftist Gustavo Petro won presidential elections on Sunday. According to Bloomberg, his program includes plans to tax big landowners and halt the awarding of oil exploration licenses. Petro also plans to facilitate conditions for the Central Bank to finance government’s fiscal deficit. This is yet another sign of resurgence of socialism in Latin America, right after another leftist candidate Boric was elected president in Chile a few months ago.
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