A trader is working on the New York Stock Exchange (NYSE) floor in New York City on June 1, 2022.
Brendan McDermid | Reuters
LONDON – Global stock markets are falling sharply after the impression of US inflation in May rekindled fears that central banks will be forced to tighten aggressive monetary policy.
The long-awaited report on the consumer price index on Friday was 8.6% higher than expected each year, which resurfaced the market’s concern that the action of the Federal Reserve and other banks could put the economy in recession.
Major U.S. averages closed their biggest weekly declines since January on Friday, and futures point to more losses on Wall Street when the opening bell rings on Monday.
Shares in Asia-Pacific fell on Monday, with Hong Kong’s Hang Seng index, Japan’s Nikkei 225 and South Korea’s Kospi falling more than 3%. European equities also fell in early operations, with the pan-European Stoxx 600 falling 2% as a red sea ravaged global risk assets.
Meanwhile, the U.S. 2-year Treasury rate hit its highest level since 2007 on Monday morning and approached an investment with the 10-year benchmark rate seen by many as a sign of a recession. imminent.
‘Pond in the pond’
Central to the market’s adverse reaction to Friday’s CPI reading is the fear that inflation expectations have widened and consolidated, beyond well-documented ephemeral factors such as bottlenecks. supply chain and energy shocks.
“I think the likelihood of falling in a bear market and, in fact, a recession has increased undeniably as a result of Friday’s punch, in a way,” Fahad Kamal, investment director at Kleinwort Hambros, told CNBC on Monday.
Kamal added that there was “very, very little good” in Friday’s inflation report, which he said indicated that inflation had not peaked and instead had spread to the whole economy.
“There is less talk of sex and the violence of oil and commodity prices and other things, but in reality the rent is very sticky and is a big part of the index. There also seems to be a boost in “This means that inflation is on track to stay with us higher and longer than we expected last week,” he said.
Richard Kelly, head of global strategy at TD Securities, told CNBC on Monday that both bond and stock markets were now indicating that a recession was coming down, most likely in the fourth quarter of 2022 and the first quarter of 2023.
“In general, if you look at equity markets, they tell you that the ISM (US economic activity index) is likely to fall to 50 or less than 50 over the next two to three months, and in part that’s what the Fed and central banks need to do to control inflation, “Kelly said.
The 50 mark separates the expansion of the contraction in a reading of the index of purchasing managers, a reliable indicator of economic activity.
“While (the Fed) can’t sit there and say its job is to end job creation for now, that’s basically what they need to do if they get back in control of inflation now,” Kelly added.
All eyes on the central benches
Next week will be crucial in the battle against rising inflation for central banks and world markets.
Federal Reserve officials will meet Tuesday and Wednesday to discuss their next monetary policy move. The Federal Open Market Committee is expected to announce at least a 50 basis point increase on Wednesday, as it has already doubled rates this year, although market bets for a 75 basis point rise have risen to the light of Friday’s CPI figure.
The Bank of England’s Monetary Policy Committee will announce its latest interest rate decision on Thursday, while the Bank of Japan, the Swiss National Bank and the BCB of Brazil will also meet this week.
Investors will also digest a wealth of economic activity data, including Chinese industrial production and retail sales, UK industrial production, employment and retail sales, and US producer price inflation. , retail sales and industrial production.
UK GDP fell 0.3% month-on-month in April, official figures showed on Monday, failing to meet economists’ expectations of a 0.1% expansion and raising fears of a slowdown before the Bank of England’s decision on Thursday.
“In general, the data series will be combed for signs of recession, with the added irony that any sign of strong activity is likely to be a case of” good news “bad (i.e., pushing harder on while the pressure on central banks is to keep some control over the narratives of the interest rate trajectory, although it has been shown to be completely wrong about inflation, “said Marc Ostwald, chief economist and global strategist at ADM Investor Services International.