Market Extra: Global growth outlook deteriorates on central bank rate hikes, raising risks for U.S. and markets
Henry Nicholls/Agence France-Presse/Getty ImagesA flurry of interest-rate hikes from European central banks on Thursday is darkening the outlook for the global economy, reigniting fears about a U.S. recession and damping the appeal of risk assets. Central banks in England, Norway, Switzerland and Turkey all lifted interest rates to combat inflation, even as the U.S. experiences some relief from the pace of rising prices. U.S. stocks DJIASPXCOMP swung between begin mostly lower to mostly higher in late-morning trading. Meanwhile, one of the bond market’s most reliable indicators of impending recessions — the spread on 2- BX:TMUBMUSD02Y and 10-year Treasury yields BX:TMUBMUSD10Y — intermittently dipped to minus 100 basis points in a pessimistic sign about the U.S. outlook. It remains to be seen whether the U.S. can continue to skirt a much-anticipated economic downturn, which has been talked about for more than a year. The world’s largest economy has surprised many in financial markets by staying afloat despite the Federal Reserve’s most aggressive rate-hike cycle in four decades and policy makers’ latest projections for another half-of-a-percentage-point of rate hikes by year-end. “The global growth outlook is deteriorating quickly as major central banks are delivering more rate hikes and signaling that more tightening is coming. Aggressive tightening from here on out will torpedo the global economy,” said Edward Moya, senior market analyst for the Americas at OANDA Corp. in New York.“It’s pretty clear Europe has an inflation problem that is not getting any better and their central banks are turning up their tightening a notch,” Moya said via phone on Thursday. “We’re going to see the economic situation deteriorate fairly quickly in Europe, and eventually that weakness will be passed on to the U.S.” Last week, Fed policy makers released projections showing they think it will be appropriate to lift the main interest-rate target to 5.6%, from a current level between 5%-5.25%. Even so, financial markets remain doubtful: Fed funds futures traders are still mostly pricing in just one quarter-point rate hike in July.In his testimony before the Senate Banking Committee on Thursday, Fed Chairman Jerome Powell reiterated the view that policy makers see more hikes are on the way, though they may be approaching the end of the road. He also said he sees a path in which inflation could cool without significant job losses.Stocks have recently rallied on the view that inflation is set to fall by more in the U.S. than the Fed expects, handing the S&P 500 and Nasdaq Composite their longest streak of weekly advances in years on Friday. As of late Thursday morning, Dow industrials were down, while the S&P 500 was trying to hold onto a slight gain of less than 0.2% and the Nasdaq Composite advanced 0.7%. Three-month through 30-year Treasury yields were higher as traders factored in higher interest rates from Europe and absorbed Powell’s testimony.“What’s really going to trigger the risk-aversion trade is when the market starts to realize and prices in more Fed tightening,” Moya said. He envisions the U.S. falling into a short-lived recession that he expects to be something “between a soft and hard landing,” and says the Fed could begin to ease next year and “provide some relief.” Recession fears could put the recent rally in stocks at risk and turn the artificial-intelligence sector into a temporary “safe-haven” trade, he said.At BofA Securities, strategists John Shin, Athanasios Vamvakidis and Shusuke Yamada said that “central banks are still primarily focused on dealing with inflation that remains elevated despite repeated rate hikes, while also trying to manage the potential recessionary consequences of deliberately engineering a slowdown.”Among currencies, they still see the U.S. dollar “as ultimately overvalued and likely to weaken over the medium term despite likely near-term strength.” Meanwhile, TD Securities strategists James Rossiter and Mark McCormick, along with analyst Lucas Krishan, said they expect the Bank of England to hike three more times by quarter-point increments each, taking its policy rate to 5.75% in November, after having delivered a bigger-than-expected half-point hike on Thursday.
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