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Markets enjoyed some relief from selling after two Fed
policymakers on Thursday hosed down bets on an aggressive 100
basis-point (bps) interest rate rise this month.
But they did not dispel fears that central banks' drive to get
on top of galloping inflation will wallop the global economy.
Recession fears were fanned further by data showing a sharp
second-quarter slowdown in the China, reflecting the colossal
hit from widespread COVID lockdowns. Annualised 0.4% growth was
the worst since at least 1992, excluding early-2020 when the
COVID pandemic erupted.
The data sent Chinese shares 1.7% lower and dragged an Asian
ex-Japan index to two-year lows, while signs of property sector
stress weighed on Hong Kong-listed developers.
"The recession angle is becoming stronger, backed by data
showing things are cracking underneath the surface," Salman
Ahmed, global head of macro at Fidelity International.
He was referring to weakening economic data almost everywhere,
contrasting with high inflation and tight labour markets.
"We moved rapidly from a stagflationary set-up to more of a
recession-dominated one, and very strong inflation is adding to
fears that the Fed will need to do more front-loaded
tightening."
Bets had grown the Federal Reserve could raise rates by a full
percentage points this month, following U.S. data showing a 9.1%
inflation print. But Fed Governor Christopher Waller and St.
Louis Fed President James Bullard, generally considered policy
hawks, said on Thursday they favoured a 75 bps move.
Markets still assign about a 45% chance to a bigger increase,
but the comments eased a Wall Street sell-off and futures tip a
flat to firmer opening for New York on Friday.
A pan-European equity index rose 0.7%, helped also by news
Italy's president had rejected Prime Minister Mario Draghi's
resignation. Italian shares bounced 0.9%, though they remain 5%
lower on the week.
Signs from companies' second-quarter earnings, meanwhile, are
not so far encouraging; a raft of European firms posted downbeat
results on Friday, following Thursday's below-forecast figures
from big U.S. banks.
BONDS AND OIL
The Chinese data sent iron ore prices down 9.1%, while Brent
crude futures fell $1 to $94.8 a barrel
Australia's mining index touched a nine-month low, weighed
further by a warning from Rio Tinto of labour shortages.
Bonds remained in demand, with U.S. Treasury yields falling
around three bps across the curve. Two-year yields held around
17 bps above the 10-year segment, the so-called curve inversion
that often presages recession.
Moves were even sharper in Europe, due to Italian political
turmoil but also as money markets dialled back some bets on
European Central Bank policy tightening by year-end.
German 10-year yields fell 11 bps to 1.071%, the lowest since
May 31.
Italy's borrowing costs slipped after jumping on Thursday by
around 20 bps but its yield premium over Germany was at the
highest in a month.
Peter McCallum, rates strategist at Mizuho, said the latest
developments put Italy in "a no-man's land", with no clarity on
whether a new confidence vote might be scheduled.
"Until then we have uncertainty, essentially."
The euro was flat, recovering slightly from two-decade lows
around $0.9952, having slid 1.5% this week and having hit parity
against the greenback for the first time in 20 years.
The yen, meanwhile, hurtled towards 140 per dollar, and last
traded at 138.8, and the dollar index eased a touch.
U.S. retail sales data later on Friday will show how consumers
are reacting to rate rises and signs of softer growth.
(Additional reporting by Tom Westbrook in Singapore and Yoruk
Bahceli in LondonEditing by Mark Potter)
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