Aurelia Butler

According to Refinitiv Lipper, investors disposed of a net $20.79 billion worth of global bond funds in a fourth straight week of net selling. Fund flows: Global equities, bonds and money markethttps://fingfx.thomsonreuters.com/gfx/mkt/zdpxoeerqvx/Fund%20flows-%20Global%20equities%20bonds%20and%20money%20market.jpg Federal Reserve Chairman Jerome Powell said this week that there was a risk the U.S. central bank’s interest rate hikes could slow the economy too much, but the bigger risk was persistent inflation.Aggravating investors concerns was U.S. consumer confidence reading, which dropped to a 16-month low in June on worries about high inflation.European and U.S. equity funds witnessed outflows of $6.46 billion and $3.78 billion, respectively, although investors purchased Asian funds worth $1.64 billion.Among sector funds, financials, healthcare, tech and energy funds saw outflows of more than $500 million each. Fund flows: Global equity sector funds https://fingfx.thomsonreuters.com/gfx/mkt/znvneggzjpl/Fund%20flows-%20Global%20equity%20sector%20funds.jpg Meanwhile, bond funds recorded weekly outflows of $20.79 billion as selling continued for the fourth week.Global investors offloaded short- and medium-term funds of $7.51 billion in their 25th straight week of net selling. High yield funds also recorded outflows worth $3.44 billion but government funds attracted inflows worth $662 million. Global bond fund flows in the week ended June 29 https://fingfx.thomsonreuters.com/gfx/mkt/jnpweoowkpw/Global%20bond%20fund%20flows%20in%20the%20week%20ended%20June%2029.jpg Money market funds too recorded outflows, losing $23.55 billion when investors exited for a third straight week.Data for commodity funds showed investors withdrew $1.42 billion, the most in six weeks, out of precious metal funds while energy funds saw outflows of 256 million, the first net selling in four weeks. Fund flows: EM equities and bonds https://fingfx.thomsonreuters.com/gfx/mkt/egvbkgglrpq/Fund%20flows-%20EM%20equities%20and%20bonds.jpg An analysis of 24,326 emerging market funds showed equity funds drew $509 million, marking a second weekly inflow but bond funds faced outflows of $3.51 billion for a third week. More

LONDON (Reuters) – Gathering gloom about prospects for the global economy lifted the safe-haven dollar on Friday and pressured risk-sensitive currencies, with the Australian dollar tumbling to a two-year low.Rampant inflation and a rush by central banks to raise interest rates and stem the flow of cheap money has fuelled sell-offs across markets and lifted assets seen as safer bets.Fresh data on Friday showed euro zone inflation hit another record high in June, while separate statistics showed manufacturing production in the bloc fell for the first time in two years.The dollar index – which tracks the greenback against six counterparts – is on track for a nearly 1% weekly gain, and was last up 0.3% on the day at 105.060.”It’s a risk-off start to the second half of the year with equities and commodities down, so the dollar is stronger pretty much across the board,” said Kenneth Broux, an FX strategist at Societe Generale (OTC:SCGLY) in London. “The Fed is committed to bring inflation under control but can it deliver a soft landing?”The U.S. Federal Reserve has lifted rates by 150 basis points since March, with half of that coming last month in the central bank’s biggest hike since 1994. The market is betting on another of the same magnitude at the end of this month.The odds were extremely low that the United States would slide into recession without dragging the rest of the world with it, RBC Capital Markets strategists said in a note. More risk-sensitive currencies fell across the board. The Australian dollar and New Zealand dollar both fell by more than 1% on the day, with the Aussie tumbling as much as 1.6% to $0.67900, its lowest since June 2020.The Reserve Bank of Australia decides policy on Thursday, and markets expect a half point hike to its key rate. But that has not helped the Aussie much, which has instead tracked commodity prices lower as the global economic outlook deteriorates.Sterling fell more than 1% to $1.20460, a day after official data showed a record shortfall in Britain’s current account deficit in early 2022.The euro slipped by as much as 0.5% to $1.04330. It was last down 0.4% at $1.04465.The European Central Bank is expected to raise interest rates this month for the first time in a decade, although economists are divided on the size of any hike.The Japanese yen gained as much as 0.75% on the day, pulling away from a mid-week low of 137.00 – its weakest in 24 years. It was last up 0.4% at 135.235 yen per dollar.In cryptocurrencies, Bitcoin resumed its slide, falling 4% to trade just above $19,000. More

According to Refinitiv Lipper data, investors jettisoned U.S. equity funds worth $3.78 billion after purchases of $11.17 billion in the previous week. Fund flows: US equities, bonds and money market funds https://fingfx.thomsonreuters.com/gfx/mkt/movanrrdqpa/Fund%20flows%20US%20equities%20bonds%20and%20money%20market%20funds.jpg Federal Reserve chair Jerome Powell said on Wednesday there was a risk that interest rate increases will slow the economy too much, but persistent inflation was the bigger worry.The U.S. economy contracted slightly more than previously estimated in the first quarter as trade deficit widened to a record high and a resurgence in COVID-19 infections curbed spending on services including recreation.U.S. growth and value funds recorded outflows worth $1.07 billion and $853 million, respectively. Fund flows: US growth and value funds https://fingfx.thomsonreuters.com/gfx/mkt/gdvzyggbbpw/Fund%20flows%20US%20growth%20and%20value%20funds.jpg U.S. investors sold health care funds worth $637 million, the most since Nov 24. Utilities, financials and tech sector funds also posted outflows of $489 million, $416 million and $378 million, respectively. Fund flows: US equity sector funds https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoeekqpx/Fund%20flows%20US%20equity%20sector%20funds.jpg U.S. bond funds saw net selling for a fourth straight week worth $8.58 billion, although outflows eased 28% from the previous week.Investors exited U.S. taxable bond funds worth $7.44 billion and $1.61 billion in municipal bond funds in their fourth straight week of net selling. Fund flows: US bond funds https://fingfx.thomsonreuters.com/gfx/mkt/jnvweoobkvw/Fund%20flows%20US%20bond%20funds.jpg U.S. short/intermediate investment-grade and domestic taxable fixed income funds faced outflows of $4.28 billion and $2.46 billion, respectively, but short/intermediate government and treasury funds attracted $1.24 billion in inflows.Outflows in U.S. money market funds continued for a third week, with investors exiting $14.95 billion in funds. More

Price growth in the eurozone hit a record high of 8.6 per cent in the year to June, intensifying tensions between rate-setters at the European Central Bank over the speed of its planned interest rate rises.Eurozone inflation increased from 8.1 per cent in May, after a sharp acceleration of energy and food prices in many countries due to supply disruptions caused by Russia’s invasion of Ukraine. Rising price pressures in the bloc more than offset a slowdown in German inflation driven by transport and electricity subsidies to cushion the higher cost of living.Economists polled by Reuters had expected eurozone inflation of 8.4 per cent. Claus Vistesen, an economist at Pantheon Macroeconomics, said the bigger than expected rise “increases the risk” that the ECB will raise rates by more than its planned quarter percentage point at its meeting in three weeks’ time, adding the central bank was “miles behind the curve”.ECB president Christine Lagarde said at the bank’s annual forum in Sintra, Portugal, this week that it would stick to its plan to begin raising interest rates with an increase of 25 basis points on July 21. She said a bigger move was likely in September, unless there is a swift slowdown in inflation. However, some hawkish rate-setters on the ECB’s governing council plan to push for a larger rate rise of 50bp in July because of concerns that price pressures show few signs of easing.Sweden’s Riksbank this week accelerated the pace of its rate rises to 50bp in response to soaring inflation, mirroring similar moves by central banks in Switzerland and Norway. The US Federal Reserve last month raised interest rates by 75bp.Unemployment in the 19 countries that share the euro fell to a new record low of 6.6 per cent in May, which is likely to add upward pressure on wages. The ECB has forecast that wage growth in the bloc will double to 4 per cent this year. Christoph Weil, an economist at Commerzbank, predicted eurozone inflation would be 7.5 per cent by the end of this year, well above the ECB’s 2 per cent target. “Unions will demand at least partial compensation for higher inflation in the upcoming wage negotiations,” he said. “Wage inflation is therefore likely to increase significantly.”The ECB is juggling a difficult balancing act between reversing almost a decade of ultra-loose money to rein in rampant price growth while trying to avoid dragging the region into a deep recession or another debt crisis after borrowing costs rose sharply in weaker countries such as Italy.Inflation rose in 17 of 19 eurozone countries in June, slowing only in Germany and the Netherlands, according to a flash estimate from Eurostat on Friday. It rose at double-digit rates in nine member states and was above 20 per cent in Estonia and Lithuania. The lowest inflation rates were in Malta and France at 6.1 and 6.5 per cent respectively.Energy prices rose by an all-time high for the eurozone of almost 42 per cent in June after Russia reduced natural gas supplies to Europe. Food, alcohol and tobacco prices in the bloc were up 8.9 per cent, reflecting disruption to supplies of agricultural commodities caused by the Ukraine conflict. “Even if demand comes down more drastically over the next few months, we think not all input costs have passed through the system yet,” said Marcus Widén, an economist at SEB. “This applies definitely to food and energy, but also to core goods and services.”Core inflation, excluding more volatile energy and food prices, slowed slightly to 3.7 per cent in June, reflecting cheaper public transport due to government subsidies. These measures included Germany’s temporary €9 monthly train ticket, which helped to slow the country’s inflation rate to 8.2 per cent.Services price growth in the eurozone slowed to 3.4 per cent, while non-energy industrial goods prices continued to accelerate at 4.3 per cent. More

KARACHI, Pakistan (Reuters) -Pakistan’s consumer price index (CPI) rose 21.3% in June from a year earlier, the statistics bureau said on Friday, for the South Asian nation’s highest inflation in 13 years.In May, the CPI was up 13.8% on the year. The month-on-month rise in June was 6.3%. The spike comes as fuel prices have risen about 90% since end-May after the government scrapped costly fuel subsidies in a bid to cut its surging fiscal deficit and secure resumption of an IMF bailout programme.Transport saw the biggest rise, with its index rising 62.2% in June on the year. The price index for food items, which make up about a third of the CPI basket, rose 25.9%.Pakistan has been struggling with high inflation for the last few months. The CPI index rose 12.1% for financial year 2021-22, which ended in June, compared with 8.9% in the last financial year. Despite rising global oil prices, subsidies for fuel and power were adopted in March 2022 by the government of previous Prime Minister Imran Khan, as he faced mounting discontent over his handling of the economy and rising inflation.He was ousted in April, and the new government began reversing the costly subsidy, which it brought on par with international prices late last month. Prices of fuel were hiked further on Thursday, with the cash-strapped government imposing a petroleum levy in its battle to reduce the fiscal deficit. The levy, which officials expect to rise even further, was part of fiscal consolidation measures agreed with the IMF to resume the bailout programme. Adding to Pakistan’s inflation woes has been the weakening of the rupee against the dollar. More

The site, Slovakia’s fifth, will bolster its standing as the biggest car producer per capita in the world, with the central European country of 5.4 million producing more than 1 million cars in 2021.For Volvo Cars, it will be its third plant in Europe and will build EVs only, in line with the company’s ambition to produce EVs exclusively by the end of this decade.The European Union aims to phase out new fossil fuel car sales by 2035.”Expansion in Europe, our largest sales region, is crucial to our shift to electrification and continued growth,” Chief Executive Jim Rowan said in a statement.The facility in the Kosice region in eastern Slovakia is designed to produce up to 250,000 cars per year. The plans also allow for future expansion, the company said in a statement.”Volvo Cars has an ambition to move towards annual sales of 1.2 million cars by mid-decade, which it aims to meet with a global manufacturing footprint spanning Europe, the United States and Asia,” it said.The investment will create 3,300 jobs around the city of Kosice, 100 kilometres (62 miles) from the border with Ukraine.The area has long had high unemployment compared with the western part of the country.”I am very pleased that Slovakia succeeded in the competition for this mega investment that will bring development and many jobs to the east of Slovakia,” Economy Minister Richard Sulik said in a statement.Volvo Cars’ other European plants are in Belgium and Sweden.Its output last year rose by 5.6% to almost 700,000 automobiles, of which 27% were either fully electric or plug-in hybrids.The company, which is majority-owned by China’s Geely Holding, listed on Nasdaq Stockholm last October.($1 = 0.9573 euros) More

Good morning. Memory chipmaker Micron put an exclamation point on the end of the first half when it reported earnings yesterday afternoon. The guidance, as always, was the important bit. Wall Street analysts expected that in the August quarter Micron would have revenue of $9bn or so. The midpoint of the company’s guidance was $7.2bn. Big miss — fitting with the inventory and goods demand worries we have been rattling on about here. Interestingly, though, the stock (already off 40 per cent this year) only fell 3 per cent in late trading. Perhaps, unlike the analysts, investors have priced in a slowdown already. Good news, if so. Were taking an extra long July 4th weekend. We’ll be back with you on Wednesday. In the meantime, email us: [email protected] and [email protected]!We’re halfway through the year. Let’s take a step back and assess where we are. The scoreboard:

In risk assets, there was nowhere to hide other than commodities. The reason (at least at first) was inflation forcing interest rates higher. Here is what happened to the yield curve in the first half:Notice that the 3-month/10-year curve (the most accurate recession indicator historically) is not even close to inversion. The 2-year/10-year (less accurate, but not useless) is within a hair’s breadth. That may be the difference between the rough market we have now and a properly panicked one we have managed to avoid so far. Turning to the internal performance of the stock market, the most talked about themes this year have been the poor performance of technology (which had clearly overshot over this cycle) and the great performance of energy. But there is a broader theme with more explanatory power: investors playing defence. The S&P is down 20 per cent. Leaving energy returns a side, as the result of an exogenous shock, the sector performance falls into three groups. Defensive stocks (utilities, staples, healthcare) have outperformed. Risky/speculative stocks (tech, discretionary) have underperformed. The rest have moved with the index:The first six months of the year have been all of a piece, though. There was a shift in the last month or two, where we went from worrying primarily about inflation to worrying primarily about recession. One way to look at this is through the relative performance of growth and value:It was value’s half, as expensive tech stocks sold off and cheap energy stocks surged. But about a month ago value’s outperformance stopped. This is consistent with recession fear. Value — that is, cheap — stocks tend to be cyclical, highly leveraged, in highly competitive industries, or all three. Historically, stocks like this do poorly heading into a recession and well in the ensuring recovery. They will look less appealing now than they did a month or so ago, when the Fed looked less fierce and indicators or economic momentum looked better.As usual, the bond market got the memo before the stock market did. The yield on the 10-year bond has been headed sideways, with some peaks and valleys, since early May, suggesting those foreseeing years of high inflation were too pessimistic. Two-year break-even inflation expectations have been falling since late March, and have fallen particularly sharply lately, suggesting that the Fed will cool inflation quite quickly:The futures market confirms the picture. It now prices rate cuts starting (slowly) in the middle of next year:To sum up. First inflation fears then recession fears have whacked risk assets in the first half. The market now appears confident that the economy will slow rapidly, and a year from now inflation will be a secondary worry. Investors are beat up, and increasingly defensively positioned, but not panicked. What’s happens in the second half? Several points we have made before are worth repeating. Global central banks are withdrawing liquidity from the financial system. Valuations (though there are attractive pockets) are still not particularly cheap. In equities, if not in bonds, there are few signs of capitulation or bottomed-out sentiment. And leading indicators of economic activity are worsening. All of this lends itself to volatility. Yes, the Fed has gone far in convincing markets that it will get inflation under control soon. But we still expect the second half in markets to be as turbulent as the first, and probably more so.More slowdown dataThe Fed is getting the demand slowdown it wants, bit by bit. That much was clear in Thursday’s personal consumption expenditure data. Real consumption fell 0.4 per cent in May, thanks to a big 3.5 (!) per cent decline in real durable goods spending. No surprise, but still good to see. The chart below smooths the data over three months and focuses on the quantity of durable goods bought each month, ignoring prices:Between rising inventories and slowing goods demand, manufacturing is also slowing down. Omair Sharif of Inflation Insights has pulled together regional Fed indicators of factory activity. Averaging across the five measured regions, new orders contracted in June. Odds are the nationwide ISM manufacturing index, set to be published today, will fall too:

Consumption remains strong, though. Real services spending grew 0.3 per cent in May, only a tiny deceleration from April. May’s core PCE inflation reading came in at 4 per cent annualised — just as it did in February, March and April. Not spinning higher, but not coming down easy either.After yesterday’s PCE report, the Atlanta Fed’s GDPNow forecast slipped into the red:

By the common rule of thumb, negative real GDP growth for a second quarter in a row puts us into recession territory. Fixating on this misses the point. What ultimately matters is whether slower growth brings inflation down (as the market expects).To be confident in that, we need convincing evidence that services inflation is coming down. But the labour market remains stubbornly hot. There has been a small uptick in jobless claims, but current levels are on par with the booming labour market of 2019. Falling goods consumption helps, but not enough. (Ethan Wu)One good questionA few readers pointed out that Tuesday’s letter on durable goods gluts didn’t adjust for inflation, suggesting new orders for durable goods could be falling in real terms (as domestic consumption of those goods already is; see above). Are they? A good question, but a hard one to answer. The data I used, from a Census Bureau survey of manufacturers, doesn’t have an exact price deflator to convert nominal values to real ones.I had a look anyway, using the closest deflator I could find, the producer price index for durable consumer goods. After adjusting for inflation, durable goods new orders are still growing, though modestly:June data will probably change this picture (see previous section). But so far US manufacturing has held up better than the dismal survey data might suggest. (Wu)One good readSure, there’s a nearly perfect inflation hedge out there. Good luck buying it. More