Daily Market Briefing - Markets Brace for Policy-Driven Slowdown

Risk appetite is weak, equities are slumping, and the dollar is moving higher into month end after the world’s most powerful central bankers unsheathed their hawkish talons at yesterday’s monetary policy forum in Sintra, Portugal. Andrew Bailey, Christine Lagarde and Jerome Powell warned attendees at the European Central Bank event that they would continue to tighten policy aggressively in an effort to avoid letting high inflation expectations become entrenched. Mr. Powell said, “We are committed to, and will succeed in getting inflation down to 2 percent… The process is highly likely to involve some pain. But the worst pain would be from failing to address this high inflation and allowing it to become persistent.”

Madame Lagarde wrote an obituary for the  “transitory” conception of inflation, noting that broken supply chains, slumping productivity, and geopolitical shocks had changed the structure of the global economy. She said, “I don't think we are going to go back to that environment of low inflation... there are forces that have been unleashed... that we're facing now that are going to change the picture and the landscape within which we operate". 

US ten-year yields are down to 3.05 percent, German bunds are nearing a one-week low, and long-term rates are descending elsewhere as investors position for a central bank-triggered economic slowdown. 

Commodity prices gained some support overnight after China released better-than-expected survey data. The National Bureau of Statistics said its official manufacturing purchasing managers' index climbed to 50.2 in June from 49.6 in May, breaking into expansionary territory for the first time since February. Easing lockdowns helped the services sector stage an impressive rebound, with the non-manufacturing index jumping to 54.7 from 47.8 in May.

The Canadian dollar remains tightly rangebound going into this morning’s gross domestic product release. Economists expect Statistics Canada to report a downshift in growth in April and May, but there is some upside potential - the country produces many of the products disrupted by the war in Ukraine, and high-frequency data suggests domestic spending levels are still holding up. 

Traders are battening the hatches ahead of what could be an “anti-Goldilocks” personal income and spending report at 8:30 am. Year-over-year growth in the core personal consumption expenditures index - the Fed’s preferred inflation measure - is expected to come in at 4.8 percent, down from 4.9 percent in the prior month, but still far too hot for policymakers. At the same time, inflation-adjusted personal consumption is likely to cool, raising recession fears. 

Oil prices are holding steady ahead of a meeting between members of the OPEC+ group of producers. The cartel is expected to announce an end to its pandemic-era output cuts, with production permitted to rise another 648,000 barrels a day in August. Many countries are missing targets, however, and global inventories remain tight. Today’s headlines will matter, but traders are more focused on behind-the-scenes diplomacy that could see Riyadh open the taps in the autumn months. President Biden’s visit to Saudi Arabia in mid-July looms as the next major event risk on the oil calendar. 

Please note: Daily and weekly updates will pause until Tuesday as we observe the Canadian and US holidays. Enjoy the long weekend! 

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THURSDAY

USD    Personal Consumption Expenditure, May

CAD    Gross Domestic Product, April

USD   Weekly Jobless Claims

CNY    Caixin China Manufacturing Purchasing Manager Index

USD    OPEC+ Meeting

FRIDAY

EUR Consumer Price Indices, June

USD    ISM Prices Paid

USD    Baker Hughes Weekly Rig Count