Market downturn continues amid fears inflation may become a self-fulfilling prophecy
Corporates | Kennett Square, PA
Hawkish activity from the Fed and bearish economic readings this past week left consumers and market participants fearful. As inflation continues to permeate the U.S. economy, the question remains: can the Fed achieve a soft landing? Eyes also turned abroad to Europe as record-high preliminary CPI inflation data necessitates action.
With record-high inflation and bearish economic signals across the board, the Fed’s goal of a soft landing could prove challenging. At the ECB Forum on Central Banking last Wednesday, Powell maintained the Fed’s aggressive rate hike policy, despite the risk of a potential recession, arguing that, “the bigger mistake to make — let’s put it that way — would be to fail to restore price stability.” One school of thought is that rising prices, and the fear of further rising prices, could actually change consumer behaviors and increase demand, thereby driving prices up. An alternate school of thought is that inflation will cool off demand, slowing economic growth and tempering prices over time. We may ultimately see both scenarios playing out in different pockets of the market. Similarly, many corporates are locking in interest rates now, for fear of rate increases that are more aggressive than current projections, while others are anticipating or hoping for a softer landing than the market is currently pricing in. Expectations of the Fed funds target rate by year-end now stand at 3.25 - 3.50%.
Despite Powell’s aspirations for a soft landing, the market continued its downturn. On Wednesday, real GDP was announced to have shrunk by 1.6% in Q1, marking the first of two consecutive negative quarters necessary to designate the economy as officially in recession. The ISM Manufacturing Purchasing Managers Index, an economic index representing U.S. manufacturing health, also took a larger hit than the market expected. The Institute for Supply Management announced on Friday that the index dropped from 56.1 in May to 53 in June, pointing to supply chain issues and lower demand. Equities were not spared either; since last Monday, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite have fallen 3.46%, 2.84%, and 3.71% respectively. The end of the quarter solidified the worst first half for the S&P 500 since 1970, a roughly 21% decline. To top it all off, the consumer confidence index came in at a 16-month low of 98.7 on Tuesday, suggesting the market may be bracing for a potential recession.
(Related insight: register for the webinar, "Semiannual Market Update for Corporates")
Globally, foreign central banks are somewhat moving in lockstep with the Fed’s hawkish monetary policy, albeit slowly. The ECB announced proceeds of the PEPP bonds that matured on Friday will be paid out to Italy, Spain, Portugal, and Greece in preparation for Eurozone rate hikes in July and September. These mark the first Eurozone interest rate hikes in 11 years. The ECB now faces a juggling act between hiking rates to combat high inflation and maintaining economic productivity across Europe. Alarmingly, this Friday, the Eurozone’s preliminary June consumer price index grew at a staggering 8.6% YoY, giving the ECB even more food for thought.
Foreign exchange markets reacted last Friday and this Tuesday to the recently announced Eurozone CPI news by flocking to the dollar. The EUR/USD exchange rate hit a 20-year low today, breaking through the resistance at 1.04 and dipping down to 1.0241. British Sterling, following a similar pattern, dipped to 1.1901 against the USD.
This week, keep your eyes peeled for the ECB’s published account of their monetary policy meeting and ECB President Lagarde’s speech. Additionally, stay tuned for U.S. crude oil inventories, June nonfarm payroll, and June’s unemployment rate.
Subscribe to receive our market insights and webinar invites
Concerned about managing financial risk in today's market?
Schedule a call with our team.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.22-0171
Our featured insights
Resilience remains: reason to raise rates?
Despite high global inflation and borrowing costs, recent economic releases have continued to show a resilient global economy. This resilience may persuade global central banks to continue to raise interest rates to tame inflation.
- Post Date
- Mar 6, 2023
Hot inflation and strong economic data add turbulence to Fed’s fight
In a short week, FOMC minutes were released detailing the pace of rate hikes to combat inflation. New economic data maintained the strong labor market view and tenacious inflation data indicated the Fed’s fight could be prolonged. The war in Ukraine has led to a battle over oil supply; natural...
- Post Date
- Feb 27, 2023
January inflation data shows the Fed still has work to do
A busy week was highlighted by stronger-than-expected inflation in January. CPI, core CPI, and PPI all exceeded market predictions. Retail sales also shattered expectations, while initial jobless claims totaled less than 200,000 for the fifth straight week.
- Post Date
- Feb 21, 2023
Banks tightened and the market rallied: what’s going on?
The European Central Bank (ECB), Bank of England (BoE), and U.S. Federal Reserve (Fed) all raised their respective benchmark rates last week. The ECB raised rates by 50 basis points to a key rate of 2.5% on Thursday and signaled another 50-basis-point hike was coming at the next meeting in March....
- Post Date
- Feb 6, 2023
GDP, PCE take steps in the right direction ahead of Fed meeting, China’s reopening leads to commodities shift
December metrics for GDP and inflation came in at promising levels, keeping market expectations consistent ahead of this week’s FOMC meeting. China’s reopening leads to increased economic activity, including increased demand for metals and oil, while natural gas struggles due to unexpectedly warm...
- Post Date
- Jan 30, 2023
Retail sales, producer price data suggest cooling economic activity
Markets responded positively to declining PPI and retail sales figures, suggesting that U.S. economic activity, and notably inflation, is slowing. Investors are pointing to the data as another piece of evidence that the Federal Reserve will be able to soften its hawkish stance on rate tightening...
- Post Date
- Jan 20, 2023
Labor market remains stoic as U.S. inflation slows, dollar weakens
The Federal Reserve appears to be in control of inflation after the most recent consumer price index report. Questions linger regarding future rate increases and the subsequent impact on the labor market. The dollar continues its march down from last year’s highs.
- Post Date
- Jan 17, 2023
2023 corporate treasury trends
Corporate treasury and accounting teams face a daunting list of concerns as they plan for 2023. Inflation at multi-decade highs, a war in Europe for the first time in 75 years, global central bank tightening, a roller coaster ride in on equity prices, and recession fears all pose challenges to...