Stock markets continue to struggle as inflation pressures build and both Fed’s Powell and ECB’s Lagarde, at the central banking forum in Sintra, stressed the need to fight inflation even if it involves some pain for the economy.
After supply worries drove oil prices higher, oil dropped again in the wake of OPEC+ confirmation of faster production hikes in July and August. IEA data released earlier in the week showed much larger drawdown of crude oil stock levels than expected, and US president Biden will travel to the Middle East and try to convince the Saudis to increase oil production further later this month. Natural gas and electricity prices continued to increase this week from already very high levels.
High energy prices are fuelling recession fears, which is particularly visible in industrial metals markets these days. Here we have seen a selloff across the board over the last couple of weeks. Copper in particular has declined to a 16-month low, driven not least by Chinese lockdowns. PMI figures indicated a strong rebound in the service sector on the back of an easing of restrictions, which also drove Chinese stock markets higher. That said, President Xi confirmed this week that zero COVID policy remains the right policy for China, which will likely pull economic growth below potential going forward. Easing restrictions also pulled manufacturing PMIs higher. The overall trend for the global manufacturing sector is still pointing down, though, with most Asian PMIs printing lower and the Bank of Japan’s quarterly Tankan business survey also disappointing for the manufacturing sector. Chinese lockdown is a key drawdown here, and easing restrictions could maybe give some relief over the summer.
Inflation continues to increase across Europe. Spanish inflation increased above 10% in June. The German fuel tax rebate and cheap public transport over the summer pulled German inflation lower in June. That said, the underlying price pressure continues to build and we will likely see another spike here when we exit the summer months. The Riksbank reacted to the increased inflation pressure by hiking rates by 50 bps as expected.
Next week, in the euro area, we will look out for ECB minutes and different views in the Governing Council about the pace of monetary tightening. Also, we will keep an eye on a meeting between German chancellor Scholz, unions, employer representatives, Bundesbank staff and leading economists to discuss ways to support consumers while avoiding a wage-price-spiral from emerging.
In the US, we get a new jobs report. A tight labour market supports the case for further Fed tightening. The FOMC minutes will probably not be so important since we have heard from several members since the meeting. We expect the Reserve Bank of Australia to hike rates by 50 bps next week on the back of still persistent global inflation pressures and we expect the National Bank of Poland to hike by 75 bps but with risk of more. Over the summer we will follow how the headwinds for the global economy accumulate, not least inflation pressures. We expect ECB to hike by 25 and Fed by 75 bps in July.