Market Briefing - Recession Worries Dominate Price Action

With the dreaded R-word dominating investor conversations, markets are back in risk-off mode this morning. The dollar is on the ascent, gaining roughly 0.4 percent over the last day on stronger demand for safe assets. Ten-year yields are holding near 3.13 percent, down almost 17 basis points from Tuesday’s peak. 

The Canadian dollar is trading with a heavy bias as commodity prices slump. West Texas Intermediate has given back yesterday’s early-session gains, Brent is down 2 percent, and raw industrial metals are coming under widespread selling pressure. 

Japan’s yen staged a modest rebound in overnight trading, outperforming as rate differentials narrowed and safe haven buying lifted inflows. Talk of official intervention in foreign exchange markets continues to ebb. 

S&P’s European composite purchasing manager index dropped precipitously, falling from 54.8 in May to 51.9 in June (a number above 50 represents expansionary conditions, while a lower number indicates a contraction). In a press release accompanying the report, the firm’s chief economist said, “Excluding pandemic lockdown months, June’s slowdown was the most abrupt recorded by the survey since the height of the global financial crisis in November 2008”. 

Europe’s economic outlook is deteriorating as the war in Ukraine settles into a protracted conflict, high energy prices hammer household budgets, and the central bank prepares to tighten monetary conditions. The euro is back on the defensive, erasing yesterday’s gains to trade near the 1.05 mark as investors lower terminal rate expectations. 

Federal Reserve Chair Jerome Powell is set to deliver a second day of Congressional testimony in a few hours. In yesterday’s session, he said policymakers intended to raise rates to match market expectations, acknowledging that this would make it “very challenging” to avoid a recession. 

Republicans were critical of the central bank’s performance, with Senator Richard Shelby saying, “the Federal Reserve failed the American people”. But market participants were broadly unconcerned, and equity prices rose during Mr. Powell’s comments. Investors currently expect the central bank to hike interest rates by another 75 basis points in July, with increases continuing at a rapid clip before peaking at 3.5 percent in early 2023. 

Jobless claims, set for release at 8:30, are expected to fall to 225,000 in the week ended June 18. With a number of other high-frequency data points exhibiting signs of weakness, we are watching carefully for a jump in these numbers, but labor market softness could take months to arrive. 

Mexico’s central bank is widely expected to unanimously approve a 75 basis point increase in the country’s benchmark interest rate this afternoon. Inflation continues to run well above the bank’s comfort zone, and officials have clearly articulated a desire to keep pace with the Federal Reserve. The peso appears to be gaining support for a push toward the 20 threshold, but much depends on how interest rate expectations in the United States evolve in the coming days. 

Upcoming Events

THURSDAY

USD    Current Account Balance, Q1

USD    Weekly Jobless Claims

USD    S&P US Purchasing Manager Indices

GBP    Bank of England Speech, Haskel

USD    Federal Reserve Congressional Testimony, Powell

USD    Department of Energy Weekly Inventories

MXN    Bank of Mexico Rate Decision

CNY    Current Account Balance, Q1

FRIDAY

JPY     Bank of Japan Speech, Amamiya

AUD   Reserve Bank of Australia Panel, Lowe

CAD    Survey of Employment, Payrolls and Hours, April

USD    Baker Hughes Weekly Rig Count