Take Five: Surging inflation, recession risk and tanking markets
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[May 21, 2022] (Reuters)
- Central banks are wrestling with
inflation and sliding stocks are feeling the heat, leaving investors to
ponder just where the so-called "Fed put" has gone.
Meeting minutes from the world's foremost policy makers may shed some
light, while New Zealand and South Korean central banks ponder how big
their rate hikes need to be to keep up with the Fed. And Washington
holds the key to a Russian sovereign default as a key deadline
approaches.
Here's your look at the week ahead from Ira Iosebashvili in New York,
Kevin Buckland in Tokyo and Dhara Ranasinghe, Saikat Chatterjee and
Karin Strohecker in London.
1/ FED THINKING
Can the Federal Reserve tame the worst U.S. inflation in decades without
dragging the economy into a recession? The bank's meeting minutes on May
25 will offer clues.
Chair Jerome Powell is confident the Fed can achieve a "soft landing" --
words that are little solace to equity markets as recession warnings
from big Wall Street banks pile up. Having raised rates by 75 basis
points since March, the Fed is expected to hike another 50 bps in July.
![](http://archives.lincolndailynews.com/2022/May/21/images/ads/current/debbiesfloral_lda_MAY_2021.png)
Powell has vowed to raise rates as high as needed to tame inflation. The
minutes will show how tenacious policy makers expect inflation to be and
whether growth is resilient enough to face much tighter monetary policy.
2/ A BEAR HUG
Wall Street is melting. Major stock market indexes are in the grip of
bear market territory with S&P 500 down some 19%, the high flying Nasdaq
has lost more than a quarter from a November 2021 peak. And there's no
respite in sight: Barclays and Goldman predict further pain for equities
as corporate margins suffer from surging inflation.
The selloff is widespread. Since the bond bull market peak in March
2020, a constant duration 30-year U.S. Treasury bond lost half its
value, safe-haven gold is down 6% this quarter. Surging volatility means
even hardened stock pickers are reluctant to take big bets.
Retail and institutional investors are also bearish. A U.S. retail
investment sentiment index is close to a March 2009 low while fund
managers are running their highest cash levels since September 2011.
3/ PIVOT POINT
Forward-looking Purchasing Managers' Index (PMI) data from the United
States, Australia, Britain, Japan and euro area is worth paying
attention to. And more so than usual with central banks caught between
surging inflation and its impact on consumers amid a darkening growth
outlook, hurt by China's COVID-lockdowns and war in Ukraine.
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![](../images/052122pics/busine19.jpg)
Passersby wearing protective face masks walk past an electronic
board displaying world stock indexes, amid the coronavirus disease
(COVID-19) pandemic, in Tokyo, Japan November 1, 2021. REUTERS/Issei
Kato
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China bounced back quickly from an initial 2020 pandemic slump thanks to bumper
exports and factory production, but the current downturn could be harder to
shake off.
Entrenched in their inflation fight, policymakers may reach a pivot point in
coming months where they have little choice but to focus on recession risk. PMIs
have held up well recently, but might show how close that turning point is.
4/ EARLY MOVERS CATCHING UP
They were early movers, but the race is on for central banks in New Zealand and
Korea to stay ahead of a Fed hot on their heels with some big-step hikes.
The Reserve Bank of New Zealand is widely seen raising rates by a half point
again on Wednesday to tame inflation though risks to the economy are rising with
recent homebuyers feeling the pain of higher mortgage rates.
Korea's new central bank governor roiled markets by flagging a half point
increase before his maiden meeting on Thursday. Falling behind the curve could
squeeze the fragile won, sending imported food and energy prices soaring.
One of the few remaining holdouts, Bank Indonesia, is tipped to stay put a
little longer when meeting on Tuesday.
5/ RUSSIA FACES DEFAULT, AGAIN
The prospect of a Russian sovereign default is back given a deadline for a U.S.
license allowing Moscow to make payments expiring on May 25 and $100 million in
interest payments due a couple of days after.
Russia's $40 billion of sovereign bonds are just one of the flashpoints after
its invasion of Ukraine on Feb. 24 sparked sweeping sanctions and counter
measures from Moscow.
![](http://archives.lincolndailynews.com/2022/May/21/images/ads/current/graue_sda_042021.png)
Also pressing, is whether gas will keep flowing to Europe as firms struggle to
confirm how they can legally buy gas if they have to pay in roubles with
payments due from May 20. The EU has advised companies against opening rouble
accounts but stopped short of saying that this would breach its sanctions
against Moscow. Russia supplies around 40% of the EU's gas.
(Compiled by Karin Strohecker; Editing by Toby Chopra)
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