North American Morning Briefing: UPDATE: Stocks will fall as recession fears to grip markets

MARKET ENVELOPES

To watch:

Personal income and expenses for May; Weekly unemployment claims; Chicago Business Barometer – ISM Chicago Business Survey – Chicago PMI for June; Canada’s GDP for June

Opening call:

Equity futures fell more than 1% on Thursday as familiar fears of further interest rate hikes and the risk of recession continued to weigh on investors.

Worries about the Federal Reserve’s path to containing decades-high inflation with aggressive interest rate hikes — and the attendant risk of recession — dominated the market narrative in 2022.

“If everything remains unchanged today, we are currently on the verge of ending [the first of the year] with the S&P 500 having its worst first half since 1970 in terms of total return,” said Deutsche Bank analyst Henry Allen.

“A big reason for this is investors’ fear that ongoing rate hikes to deal with inflation will eventually lead to a recession,” Allen said.

Overseas, the pan-European Stoxx 600 fell 1.7% and Tokyo’s Nikkei 225 lost 1.5%.

“We’re at the end of the month and the quarter. We’re likely to see significant rebalancing flows from institutional investors across multiple asset classes,” said Jeffrey Halley, analyst at brokerage OANDA. “It can skew price movements and generate a few false positives in markets today.”

A catalyst in the day ahead could be the personal consumption expenditure price index. The data will be watched closely, as the PCE is the Fed’s preferred inflation indicator.

Economic overview:

Global consumer confidence in June rose to levels seen only in economic recessions, according to JPMorgan’s Global Headline Indicator, which excludes China.

The magnitude of the current shock to consumer confidence is about 85% of the decline seen during the initial Covid-19 outbreak and about three-quarters of the shock during the 2008 global financial crisis, JPM said. The decline from last year’s peak was widespread, though it was larger in developed markets than in emerging markets, the data showed.

The fall in confidence is largely due to worries about inflation, although consumers are likely also reacting to the sharp decline in stock markets and broader worries about the outlook for the economy, JPM said.

Regional manufacturing survey data in the United States shows supply chain shortages have improved in recent months, Capital Economics said.

Easing bottlenecks will likely help dampen core goods inflation in the second half of the year, with core producer price inflation expected to fall to 5% in the coming months , compared to 8.3% in May.

“The fact that supply chain pressures are already easing is an encouraging sign, the Fed’s inflation problem may soon seem less daunting.”

Forex:

The dollar fell slightly in Europe, but the USD index remained above 105.00 after the dollar’s strong gains on Wednesday.

Recession fears appear to have strengthened, CMC Markets said, after the final US GDP reading was revised down while the GDP deflator rose further, indicating a marked slowdown in economic growth.

Read: Sweden becomes latest to raise interest rates, with 50 basis point policy change

Energy:

Oil prices rose slightly in Europe ahead of an OPEC+ meeting where member states will discuss production levels

Despite growing concerns over a tighter market, cartel members and allied oil-producing nations are expected to stick to a plan outlined at a previous meeting to boost oil supply by just under 650 000 barrels per day in August.

Whatever production levels the group commits to, the oil market fears that the group will be behind on its quotas due to a lack of available capacity.

“The headache in the oil market is the inability of OPEC+ to deliver the promised volumes,” said DNB Markets.

Metals:

Gold futures were flat in early trading despite the fall of other recession hedges acting as headwinds for the precious metal this year.

“Gold is still an underperformer, catching a drop in the deflated commodity super cycle on the back of anticipated Fed hikes,” SPI Asset Management said.

Base metal prices were lower in London as a lack of Asian buying outweighed positive sentiment from decent PMI data from China.

“While we had a very decent Chinese PMI showing a V-shaped recovery from April lows, metals in general barely reacted to this,” Marex’s Asian team said. “Asia has not been a buyer of metals in general,” keeping prices lower.

   
 
 
   
 
 

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(MORE TO BE FOLLOWED) Dow Jones Newswires

June 30, 2022 05:30 ET (09:30 GMT)

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