Please see the latest Weekly Market Commentary from Brooks Macdonald received yesterday evening:
- The market focused on recession risks last week as economic data disappointed and European energy security came in focus
- With European and US inflation data in focus, bond markets will be looking for signs of peaking price pressure
- Wednesday sees the Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) heads discuss the need to navigate economic growth fears and inflation risks
The market focused on recession risks last week as economic data disappointed and European energy security came in focus
Recession fears raised their heads again last week with bond markets pricing in a more dovish global central bank backdrop as a result. After one of the worst weeks for equity market performance the week prior, equities recovered significant ground, particularly in the US which was insulated from the energy security risks in continental Europe.
With European and US inflation data in focus, bond markets will be looking for signs of peaking price pressure
This week we see a series of inflation releases from Europe and the US. On Wednesday the German Consumer Price Index (CPI) data will be released, followed by the wider Euro Area on Friday. There is some debate as to whether we are at peak inflation yet in the Eurozone with consensus expectations pointing to a small tick up in the year-on-year rate compared to last month. With commodity prices having fallen significantly in June however, this may mean we are a month or so away from that peak. Thursday sees the release of the US’s core Personal Consumption Expenditures (PCE) inflation alongside a series of personal income and spending data. This Core PCE release is the Fed’s preferred inflation measure so will be closely watched as investors debate whether a 50 or 75bp rate hike is most likely for the July meeting.
10 year yields fell in both Europe and the US last week as economic data continued to paint a weaker picture and fears over a Russian gas cut-off played through European markets. Central banks remained hawkish however with San Francisco Fed President Daly backing another 75bp rate hike at the July meeting, joining other governors who are considering another outsized move. One of the focuses of the market will be this disconnect between the market’s focus on economic growth risks and the Fed’s focus on inflation risks. With a tight US labour market, economic growth fears have been relegated by the US central bank but given that is now a real concern in the bond market, the Fed will come under pressure to consider both factors at upcoming meetings.
Wednesday sees the Fed, ECB and BoE heads discuss the need to navigate economic growth fears and inflation risks
One of the highlights of this week will be the ECB’s Forum on Central Banking which sees Fed Chair Powell, ECB President Lagarde and Bank of England Governor Bailey join a policy panel on Wednesday. Given the range of views on the relative importance of economic risks between those three central banks, this is likely to be an interesting conversation and may encourage all participants to adopt a more balanced tone.
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Andrew Lloyd DipPFS
28/06/2022