- Two-Decade Low
- Germany Posts First Monthly Trade Deficit
- The World Needs More Than Crumbs From the G7’s Table
- Sanctions Threaten Russia’s Next Huge Oil Field
- Natural Gas Soars 700%
- Nuclear Power Gets New Push in U.S., Winning Converts
- Joe Biden’s Misguided Plan
- US Recession Chances Surge to 38%
- If the U.S. Is in a Recession, It’s a Very Strange One
- Few Tools to Tame Prices
- Stoking Anxiety at the Fed
- How Wall Street Escaped the Crypto Meltdown
- Amazon, Microsoft, Google Strengthen Grip on Cloud
- Airline SAS Files for U.S. Bankruptcy Protection a
- Bosses Offer Midyear Raises
- Lonely Last Days in the Suburban Office Park
- Half of Wall Street Bankers May Be Working From Home
Stormy predictions are making waves as the market heads into the second half of 2022, with all in agreement that inflation must be brought under control and supply shocks have to come to an end before things can turn around. "We can't afford to be fooled again on this, or else it's going to get beyond us," Chicago Fed President Charles Evans warned last month, fearing dreaded inflation expectations that could make it even harder to bring down prices. While a recent decline in commodities has provided slight optimism, the central bank's monetary policy will feed directly into investing sentiment over the next six months, as well as the potential for a damaging recession.
Quote: "The good news is that H1 is now over, the bad news is that the outlook for H2 is not looking good," wrote Jim Reid, global head of credit strategy at Deutsche Bank. "Many of the tailwinds for investment markets are now becoming headwinds. That points to a phase of ongoing market turbulence," added Joe Little, chief strategist at HSBC. "Investors will need to be realistic about return expectations, and they will need to think harder about diversification and portfolio resilience."
On the economic calendar this week are minutes from the Fed's June policy meeting tomorrow and the release of the closely-watched jobs report on Friday. Investors are already on edge following last week's warning from Facebook-parent Meta (META), which slashed engineering hiring to prepare for "one of the worst downturns that we've seen in recent history." Meanwhile, the Atlanta Fed's GDPNow forecast for Q2 is now pegged at -2.1%, setting up the perfect storm. It was only four days ago that the GDP tracker predicted a negative print, falling precipitously from an estimate of 2.5% growth in mid-May that flatlined by mid-June.
Tropical depression turned hurricane? "That brings us to the final question: Will equity markets rebound from the current bear market (a decline of at least 20% from the last peak), or will they plunge even lower? Most likely, they will plunge lower," wrote Nouriel Roubini, professor emeritus of economics at NYU's Stern School of Business. "After all, in typical plain-vanilla recessions, U.S. and global equities tend to fall by about 35%. But, because the next recession will be both stagflationary and accompanied by a financial crisis, the crash in equity markets could be closer to 50%." (15 comments)
Trouble is brewing in Europe, where the euro just hit its lowest level against the dollar since 2002. Traders are gauging the amount of hiking the ECB will be able to pull off, given growing fears of a recession that could compound problems resulting from the war in Ukraine. That would translate into a tougher time matching U.S. interest rate hikes, on top of risk-averse investors that continue to pile into the safe-haven greenback (the dollar is up 9% vs. the euro since the start of the year).
Bigger picture: "The question of how the ECB will deal with a potential widening in spreads is set to come increasingly to the fore as they almost certainly embark on their first hiking cycle in over a decade this month," noted Deutsche Bank's Jim Reid. "And yesterday we heard some further comments from ECB officials on that hiking cycle, with Estonia’s Muller pushing back against the calls from others to start with a 50bps hike, saying that it was appropriate to begin with a 25bps move in July, and then 50bps in September as they've signaled."
On the geopolitical front, Russia next week will shut down the Nord Stream 1 pipeline for summer maintenance activities, but many regulators and analysts fear the EU's biggest piece of gas import infrastructure won't be turned back on. Shares of Uniper (OTC:UNPRF) plunged 28% in Germany on Monday following reports that the gas giant was talking to the government over a potential bailout package worth as much as €9B. Many companies are buckling under the cost of soaring prices for natural gas imports, and crunches could trigger a collapse in the eurozone market.
Across the channel: The Bank of England also sounded the alarm in its latest financial stability assessment published this morning, warning that the outlook for the economy has "deteriorated materially" and is "very uncertain." "Given this, we expect households to become more stretched in the coming months," according to the report. "They will also be more vulnerable to further shocks." (3 comments)
Chinese tariff relief appears to be back on the table at the White House as the Biden administration continues to confront red-hot inflation readings. At a basic level, some economists have found that Chinese exporters generally didn't lower prices to keep their goods competitive, meaning U.S. importers passed the duties on to American consumers. Others say the move would not target inflation at its core (tariffs have been around since 2018) and would do little while rewarding an authoritarian government.
Snapshot: Reports suggest that a tariff rollback could come this week, though a decision isn't final and any announcement could be postponed. Possible steps include lowering duties on several categories of consumer goods, ranging from clothing to school supplies. A broad framework to allow importers to request tariff waivers could also be launched, as well as a fresh probe under Section 301 of the Trade Act focused on China's industrial subsidies.
Any easing would coincide with the end of a comment period for businesses that have benefited from the levies. The U.S. Trade Representative, which is conducting a mandatory four-year review of the Trump-era tariffs, collected industry feedback on the first batch of Chinese industrial imports valued at $34B from May 7 until July 5, while a second round covering $16B in imports will be compiled from June 24 to August 22. "The first step in the process is notifying representatives of domestic industries which benefit from the trade actions, as modified, of the possible termination of the actions, and of the opportunity for these representatives to request continuation of the actions," according to a notice in the Federal Register.
Thought bubble: The Biden administration has been divided over the matter, with Treasury Secretary Janet Yellen calling for the reduction of "unnecessary burdens," and the USTR's Katherine Tai and NSA's Jake Sullivan viewing tariffs as economic leverage to get concessions out of Beijing. "From the domestic political perspective, there are two very strong, competing concerns. One is the need to be perceived as fighting inflation. And the other is the need to be seen to be very strong in standing up to China," explained Claire Reade, former Chief Counsel for China Trade Enforcement. "The question is how do you take all of these divergent concerns and harmonize them into one policy?" (10 comments)
Speaking of inflation, another Twitter feud erupted over the weekend between the White House and Jeff Bezos, who is increasingly becoming vocal on social media (shades of Musk?). The Amazon (AMZN) founder already criticized the Biden administration for rising price pressures back in May, saying the failed "Build Back Better" bill and proposed $3.5T to federal spending would have only exacerbated the current inflationary environment. Bezos has also taken issue with claims that "wealthy companies do not pay enough in tax," and is likely upset at Biden's support for organized labor given recent unionization efforts at Amazon that have been building since he took office.
The latest: "My message to the companies running gas stations and setting prices at the pump is simple: this is a time of war and global peril. Bring down the price you are charging at the pump to reflect the cost you're paying for the product," President Biden tweeted on Saturday, before Bezos took to Twitter with a response. "Ouch. Inflation is far too important a problem for the White House to keep making statements like this. It's either straight ahead misdirection or a deep misunderstanding of basic market dynamics."
"Oil prices have dropped by about $15 over the past month, but prices at the pump have barely come down. That's not "basic market dynamics." It's a market that is failing the American consumer," White House Press Secretary Karine Jean-Pierre wrote, wading into the tussle. "But I guess it's not surprising that you think oil and gas companies using market power to reap record profits at the expense of the American people is the way our economy is supposed to work." According to AAA, the price for a gallon of regular gas now averages $4.80 nationwide, around $1.70 higher than a year ago, but down 4% from the record high of $5.02/gallon seen on June 14.
Go deeper: Pump prices can vary tremendously by location, and currently span several dollars even based on the state due to taxes and fees. Some point out that gas station operators have very small profit margins on their gas (making the bulk of their money from in-store purchases), though refiners and oil-and-gas companies can have influence on those final prices. Looking to alleviate pain for U.S. drivers and the economy, the Biden administration has already tapped the U.S. Strategic Petroleum Reserve and is seeking to enact a federal gas tax holiday. It has also lobbied the G7 to impose a cap on Russian oil exports, tried to increase the global production of OPEC producers and just proposed a drilling plan that could allow limited leasing off Alaska and in the Gulf of Mexico. (143 comments)
In Asia, Japan +1%. Hong Kong +0.1%. China flat. India -0.1%.
In Europe, at midday, London -1.1%. Paris -1.3%. Frankfurt -1%.
Futures at 6:20, Dow -0.5%. S&P -0.5%. Nasdaq -0.7%. Crude flat at $108.42. Gold +0.1% to $1803.70. Bitcoin +1.5% to $19,662.
Ten-year Treasury Yield -1 bps to 2.89%
Today's Economic Calendar
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