Market Briefing - Recession Fears Send Markets Lower, Even As US-China Relations Thaw

The dollar is rolling through foreign exchange markets like an unstoppable juggernaut this morning, crushing major and exotic currencies alike. Commodity prices are down, bonds are rallying, and equity futures are set for a weaker open as worries about a worldwide economic downturn outweigh hopes of a rapprochement with China, hurting risk appetite and heightening demand for safe assets. 

Treasury Secretary Janet Yellen and Vice Premier Liu He talked last night amid unconfirmed reports suggesting US president Biden is preparing to lift some tariffs on China. The administration is desperately seeking ways to reduce inflation pressure in the American economy, and the step would signify a cooling in the “trade war” begun under former President Donald Trump.

Such a move would be largely symbolic: there was little discernible impact on inflation rates when the tariffs were originally imposed, and Chinese exports have gone from strength to strength over the intervening period. There are also significant risks: a unilateral removal might eliminae a source of leverage, and Republicans will undoubtedly seize on the issue to portray Biden as soft on China. 

The euro is trading near a 20-year low, on course to challenge parity with the dollar as investors lower European Central Bank policy expectations. Sentiment indicators are pointing to recession in the bloc’s biggest economies, limiting the central bank’s capacity to respond to high inflation by raising interest rates. Year-end implied rates have fallen by the equivalent of two quarter-point rate increases in the last two weeks. 

Russian energy shipments are plunging, and European wholesale gas prices jumped another 8 percent overnight as workers in Norway went on strike, threatening flows from the region’s second-largest supplier. Electricity costs are holding near the highest levels on record. 

The Canadian dollar is trading near the bottom of its range as oil prices slump and the dollar rises, ignoring two Bank of Canada surveys, released yesterday, showing consumers now think inflation will top 6.8 percent over the next year and 78 percent of businesses expect prices to rise more than 3 percent a year over the next two years. The West Texas Intermediate and Brent oil benchmarks are both down, holding near $108 and $112 a barrel, respectively. 

The Reserve Bank of Australia delivered a second consecutive hike last night, raising its benchmark lending rate to 1.35 percent. Bonds rallied and the Aussie fell on a perceived lack of hawkishness in the accompanying statement. 

Japanese real cash earnings slumped 1.8 percent on a year-over-year basis in May, making it less likely the Bank of Japan will change the yield curve control policy that sees it buying government bonds in unlimited quantities. 

Today’s North American data docket is relatively clear. The United States will release May factory orders and revised durable goods data, both of which have (arguably) been superseded by the June manufacturing survey from the Institute for Supply Management, which showed a sharp decline in activity. Tomorrow’s Job Openings and Labor Turnover report and Fed minutes could prove more interesting, but both are also essentially backward-looking, with traders more focussed on how conditions might evolve in the months to come. 

Friday’s non-farm payrolls report is expected to show a slowdown in hiring activity, with 275,000 jobs created in June, down from 390,000 in the prior month. Wage growth is likely to fall slightly, and the unemployment rate could tick higher, reinforcing recession worries in financial markets. 

Upcoming Events

TUESDAY

USD Factory Orders, May

USD    Durable Goods Orders, May, Final

WEDNESDAY

USD Job Openings and Labor Turnover Survey, May

USD    Federal Reserve, June Meeting Minutes

THURSDAY

USD Trade Balance, May

USD    Weekly Jobless Claims

MXN    Bank of Mexico,  Meeting Minutes

USD    Department of Energy Weekly Inventories

FRIDAY

EUR European Central Bank Speech, Lagarde

USD    Non-Farm Payrolls, June

USD    Baker Hughes Weekly Rig Count