Bassanese Bites: Bad news is bad – July 04 2022

Week in review

Global stocks weakened last week as the previous week’s hope of a soft landing morphed into fears of a hard landing, especially given a plunge in US consumer expectations and a weak ISM manufacturing report. Note, moreover, Wall Street weakened despite a slightly lower than expected rise in core consumer prices, likely because the same report revealed weaker than expected consumer spending which now makes a Q2 negative GDP outcome (and hence two quarters of negative economic growth) more likely.

It turns out bad news is bad news after all, especially if it is sufficiently bad. My call two weeks ago of an impending US recession remains firmly in place.

While US 10-year bond yields dropped for the second week in a row to 2.9% (a double top?), and Fed futures are now toying with the idea of rate cuts next year, near-term rate hike expectations remain strong – with a 90% probability still attached to a 0.75% Fed rate hike later this month. In other words, despite emerging weak activity data, the Fed is not yet prepared to pivot – as inflation remains stubbornly high and labour markets very tight. This is also why the $US remains strong.

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