MARKET WRAPS
Watch For:
Germany Ifo Index; UK BOE Asset Purchase Facility Quarterly Report, CBI Industrial Trends Survey; updates from Julius Baer, LVMH, Galp Energia, Volkswagen, Ryanair, Philips, Anglo American Platinum, AngloGold Ashanti, Sasol
Opening Call:
Recession fears will continue to dominate the mood in Europe in a week when another big Fed rate hike is likely. In Asia, shares were mostly weaker; the dollar and Treasury yields were steady; and oil and metals fell.
Equities:
The growing threat of a recession in Europe will continue to weigh on investor confidence and drag regional stocks lower on Monday.
Traders remain focused on the flow of Russian natural gas through the Nord Stream pipeline, as well as the ripple effects from the resignation of Italian Prime Minister Mario Draghi.
However, Wednesday's Federal Reserve rate decision will be the main event this week, with the central bank likely to announce its second 0.75% point increase in its short-term rate in a row.
On Sunday, Treasury Secretary Janet Yellen downplayed the risk of a U.S. recession, given the strong labor market and strong consumer spending trends, even as economists brace for key economic output data later this week.
Read Barrons.com: Yellen: Economy Is Slowing, But It's Not a Recession
Economic Outlook:
Weaker PMI data in the U.S. and Europe has seen traders pare expectations for how much their central banks will raise policy interest rates. It's a logical response, said ANZ.
But in this time of supply disruptions and super-tight labor markets, the standard assumption that weak growth means less tightening may or may not be valid, it said.
Central banks worldwide have their focus firmly on inflation. And given inflation is the last indicator to respond to monetary policy tightening, the risk of missing the turn and causing a harder landing than necessary is of course fairly high. But central banks have no choice, with their inflation-targeting credibility on the line, ANZ said.
Forex:
The dollar was mixed in a risk-off Asian session but may strengthen this week ahead of the FOMC meeting.
"We think the dollar will strengthen again in the coming weeks given that the Fed faces fewer constraints on its monetary policy than the ECB and is likely to hike rates aggressively," said Capital Economics.
Bank of America said the dollar is likely to reach parity with the euro, but end the year at $1.05.
It lowered its forecast for the euro arguing that markets liked the ECB's higher-than-telegraphed 50-basis point rate increase, but not the "vagueness" of its plan to buy debt from vulnerable economies in the eurozone.
"We have been bullish USD, but it turns out not enough. We see persistent inflation remaining a key FX driver. USD may have peaked but should remain strong until Fed more concerned about growth than inflation."
Other News:
Goldman Sachs economists said that dreams of a 100 basis point rate rise are pretty much dead for this week's next FOMC meeting, and a 75 basis point hike is very likely.
"The key question...is what guidance [Jerome] Powell will give about the size of a likely rate hike in September," Goldman Sachs said, adding "we expect that Fed officials will want to keep their options open and will avoid any strong guidance."
Goldman Sachs currently eyes a 50 basis point rise in September.
Bonds:
Long-dated Treasury yields held steady after they slid on Friday for a second straight week on economic fears.
Investors continue to embrace the idea of a 75-basis point Fed hike this week, keeping the yield curve inverted. Tradeweb said as of Friday, the three-month/10-year yield spread was the flattest since March 2020.
The inverted yield curve has plenty of folks worried about its recessionary implications, but BNP Paribas economists warn that the Powell's preferred way to read yields is more benign over the near term.
"The Fed's preferred financial market recession predictor, the near-term forward spread, remains upward sloping. However, the forward curve implies inversion and rising recession risks by the fall. Despite a massive growth deceleration this year, which may seem to indicate the U.S. economy is heading into a recession, a hard landing can be avoided, in our view--but it's a close call."
Energy:
Oil futures were lower in Asia, extending their recent retreat and remaining below $100.
"A jump in Chinese Covid infections and evidence of softer U.S. gasoline demand have provided the sour eye candy," said SPI Asset Management.
Near-term focus will likely be on a rebound in Libyan oil production, as well as expectations of a restart for the Keystone pipeline as early as this week, it added.
Metals:
Gold edged lower after it snapped a 5-week losing streak on Friday, settling higher for a second day.
IG said traders will likely focus on the upcoming Fed rate decision. "Whether gold prices can find a more sustaining upside may largely revolve around the Fed's guidance of how they expect pricing pressures to drive their scope of tightening ahead."
Read: Gold Prices Hit by Renewed Bets on Higher Yields and Stronger Dollar
---
Base metals were weaker on global recession fears and worries of production cutbacks in Europe, with copper and aluminum pulling back after rising last week when a weaker dollar helped boost investor sentiment.
---
Chinese iron ore futures rose, and near-term sentiment may be helped by further government support fro Beijing for the property sector as well as a ramp-up in infrastructure projects, said Citic Futures.
Investors may also focus on developments relating to China's ongoing efforts to centralize its billion-ton iron ore trade.
TODAY'S TOP HEADLINES
Yellen: Economy Is Slowing, But It's Not a Recession
Treasury Secretary Janet Yellen says the U.S. isn't in a recession given the strong labor market and strong consumer spending trends even as economists brace for economic output data for the second quarter to be released later this week.
Many economists see two consecutive quarters of contracting gross domestic product as a sign of recession. While that could be one of the outcomes when the preliminary data for second quarter GDP is released Thursday by the Bureau of Economic Analysis, the expectation is for growth of 1.6% after a first quarter contraction of 1.6%.
Congress Looks to Move Forward on Chip-Shortage, Drug-Cost Bills Before August Break
WASHINGTON-Congress nears the close of a packed legislative session this week, aiming to pass legislation providing about $54 billion to boost U.S. semiconductor manufacturing while also juggling a raft of other bills ahead of the monthlong August recess.
Along with the bipartisan bill subsidizing chips, Democrats are hoping to salvage a piece of President Biden's once-ambitious domestic agenda, looking to advance a measure aimed at lowering some drug and healthcare costs. The party is also weighing whether to hold votes related to social issues and guns that could help rally the party's base.
U.S. Risks Deeper Downturn If Fed Has to Fight Inflation Alone
After the 2008 financial crisis, the U.S. relied heavily on the Federal Reserve to stimulate growth, leading to a frequent quip that monetary policy had become the "only game in town."
Now, high inflation is fanning fears this is true again but in the opposite direction: Washington risks relying excessively on the Fed to lower inflation by reducing demand rather than have other policy makers work to increase the economy's capacity to supply more goods and services or workers.
China Bets Big on Basic Chips in Self-Sufficiency Push
China is leading the world in building new chip factories, a step toward achieving more self-sufficiency in semiconductors that could eventually make some buyers reliant on China for many of the basic chips now in short supply.
As chip makers race worldwide to boost production and ease supply shortages, no country is expanding faster than China, which is slated to build 31 major semiconductor factories, known as fabs, during the four years through 2024, according to the chip-industry group SEMI.
Gold Prices Hit by Renewed Bets on Higher Yields and Stronger Dollar
Inflation keeps surging to multiyear highs, yet gold can't catch a break.The most actively traded gold futures contract has fallen $79.90, or 4.4%, to $1,727.40 troy ounce in July, on pace for its fourth consecutive month of decline. That would be the longest losing streak for gold since November 2020, after fresh signs of accelerating inflation spurred bets that the Federal Reserve will act aggressively to tame inflation.
There Are Signs Inflation May Have Peaked, but Can It Come Down Fast Enough?
Growing signs that price pressures are easing suggest that June's distressingly high 9.1% increase in consumer prices will probably be the peak. But even if inflation indeed comes down, economists see a slow pace of decline.
Ed Hyman, chairman of Evercore ISI, pointed to many indicators that 9.1% might have been the top. Gasoline prices have fallen around 10% from their mid-June high point of $5.02 a gallon, according to AAA. Wheat futures prices have fallen by 37% since mid-May and corn futures prices are down 27% from mid-June. The cost of shipping goods from East Asia to the U.S. West Coast is 11.4% lower than a month ago, according to Xeneta, a Norway-based transportation-data and procurement firm.
What CEOs Are Saying: 'We See Inflation Deeply Entrenched'
Here is what some of the world's corporate leaders said in their quarterly earnings reports recently about the economy, supply chain, and the advertising and energy markets.
Goldman Sachs Group Inc. Chief Executive David Solomon:
The Central Bank That Holds the Fate of Nations in Its Hands
(MORE TO FOLLOW) Dow Jones Newswires
07-25-22 0038ET
