Aurelia Butler

“We have to act forthrightly and aggressively to get inflation to turn around and get it under control … or you could suffer a decade of high and variable inflation,” Bullard said during a panel discussion on central banks and inflation hosted by UBS in Zurich, Switzerland.”So front-load today, get inflation under control in short order and get inflation back on a path to 2%,” Bullard added.Last week, the Fed raised its benchmark overnight interest rate by three-quarters of a percentage point – its biggest hike since 1994 – to a range of 1.50% to 1.75%, and signaled its policy rate would rise to 3.4% by the end of this year.Bullard has previously said he wants to see the Fed’s policy rate increase to 3.5% by the end of 2022, a point he repeated on Friday. Once borrowing costs rise high enough to put downward pressure on inflation and disinflationary forces take hold, the central bank could possibly begin to cut rates, he said.The St. Louis Fed chief also downplayed the risk of recession, saying that rate increases will probably slow the economy to a trend pace of growth, rather than below trend.”This is the early stages of a U.S. expansion … unless we get hit by a bit shock or something, it would be unusual to go back into recession at this stage,” Bullard said.On Thursday, Fed Chair Jerome Powell told lawmakers the central bank’s commitment to reining in inflation, which is running at a 40-year high, is “unconditional.” More

LONDON (Reuters) – The fastest rate-hiking cycle in decades and inflation nearing double-digits has got investors scouring market moves and data to gauge whether the world economy is headed for recession.Business activity is slowing, many stock indexes are in “bear” territory, while higher borrowing costs are squeezing corporate and consumer spending. The U.S. Federal Reserve last week upped interest rates by 75 basis points, its biggest single rate hike since 1994, and has signalled its commitment to containing price pressures even if it brings about a growth downturn.”Inflation is still rising and that means the Fed will hike more and move more rapidly, which will put downward pressure on the economy, so that’s adding to recession fears,” said Seema Shah, chief strategist at Principle Global Investors. “There are also growing signs of economic weakness coming earlier than expected.”The World Bank currently expects 2022 global growth at 2.9%. Here is what some closely-watched indicators are saying about recession risks.1/ OLD FAVOURITE The U.S. Treasury yield curve has a track record of predicting recessions, especially when two-year yields rise above 10-year maturities. At around 5 basis points (bps), the spread between the two segments has flitted in and out of negative territory recently, so recession watchers are paying attention.The U.S. bond yield curve https://fingfx.thomsonreuters.com/gfx/mkt/movanryqnpa/recession2406.PNGThe concern is that the Fed, facing 8%-plus inflation, will take monetary policy into what economists call restrictive territory, slowing economic activity. “Chances the Fed can land on that narrow strip of safe ground are very remote,” Mizuho senior economist Colin Asher said.Money markets, having slashed bets on how high the Fed will take interest rates, now expect rates to fall about 20 bps between April and July 2023.2/ PMI PROBLEMSPurchasing Managers’ Indexes (PMI) are reliable predictors of manufacturing, services, goods inventories, new orders, and therefore future growth.A global composite PMI index from JPMorgan (NYSE:JPM) was the weakest since July 2020 in May, with the new orders component only just above the 50 level dividing activity expansion from contraction. PMI https://fingfx.thomsonreuters.com/gfx/mkt/movanrwgjpa/Pasted%20image%201656002596986.pngU.S. PMIs too have fallen, with manufacturing decelerating sharply in June. Sub-50 readings coincided with recessions in 2008 and 2020. “Global PMIs sliding towards 50 is another sign that the post-COVID boom is behind us,” Mizuho’s Asher said. US PMI https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoeqznpx/Pasted%20image%201656004378870.png3/ COUNTING COMMODITIES Copper, a well-known growth bellwether, has slid 7% this week – its sharpest weekly drop since the March 2020 meltdown.Dubbed “Dr Copper” because of its record as a boom-bust indicator, the metal has also seen its price ratio to gold hit an 18-month low. In short, if you think the economy’s tanking, dump copper and buy gold.Brent crude has also slid 10% in June and is set for its biggest monthly fall since November. copper-gold https://fingfx.thomsonreuters.com/gfx/mkt/gdvzygnmdpw/Pasted%20image%201656054034298.png4/CARING ABOUT JUNK Corporate sector stress, especially at the lower end of the credit spectrum, is another warning signal.Financing costs for sub-investment grade, or “junk” U.S. companies have almost doubled this year to 8.51%. In euro markets, yields have soared to 6.8% from 2.8%.According to BofA, if recession becomes a consensus view, U.S. junk bonds’ risk premia would average 600-650 bps, and peak above 700 bps. At current spreads around 500 bps, the index “is about 70% on our way to pricing in a certainty of a recessionary outcome”, BofA analysts wrote. Spreads on bonds rated triple-C and lower – facing the highest default risk – have risen above 1,000 bps, a significant sign of stress. U.S. junk bond spreads https://fingfx.thomsonreuters.com/gfx/mkt/xmpjowjjdvr/junk%20bonds%20june%2024.png5/ SHIFTING CONSENSUS Several big banks are flagging increased likelihood of recession.Goldman Sachs (NYSE:GS) forecasts a 30% chance of the U.S. economy tipping into recession over the next year – versus 15% earlier – while Morgan Stanley (NYSE:MS) places U.S. recession odds for the next 12 months at around 35%.Citi forecasts a near-50% probability of global recession.Citi’s Economic Surprise Index, measuring the degree to which the data is beating or missing forecasts, has fallen sharply for both Europe and the United States. US, euro area surprise index is pointing sharply lower https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnxwwwpq/SURPRISEINDEX.PNG More

BRUSSELS (Reuters) -EU leaders met on Friday to prepare for further cuts in Russian gas, limit the impact on inflation and seek alternative supplies, accusing Moscow of “weaponising” energy via a supply squeeze that Germany warned could partly shut its industry.A day after celebrations over setting Kyiv on the road to membership of the bloc, Friday’s summit in Brussels was a sober reflection on the economic impact of Russia’s invasion of Ukraine.”The notion of cheap energy is gone and the notion of Russian energy is essentially gone and we are all in the process of securing alternate sources,” Latvian Prime Minister Krisjanis Karins said, adding governments must “support those portions of society that suffer the most”.Leaders of the 27 EU nations will, according to a draft summit statement seen by Reuters, place the blame for a huge spike in prices and sagging global growth on the war that began exactly four months ago.Following unprecedented Western sanctions imposed over the invasion, a dozen European countries have so far been thumped by cuts in gas flows from Russia.”It is only a matter of time before the Russians close down all gas shipments,” said one EU official ahead of Friday’s talks.German Economy Minister Robert Habeck warned his country was heading for a gas shortage if Russian supplies remained as low as currently, and some industries would have to close come winter.”Companies would have to stop production, lay off their workers, supply chains would collapse, people would go into debt to pay their heating bills,” he told Der Spiegel magazine, adding it was part of Russian President Vladimir Putin’s strategy to divide the country.The EU relied on Russia for as much as 40% of its gas needs before the war – rising to 55% for Germany – leaving a huge gap to fill in an already tight global gas market.’WEAPONISATION OF GAS’Inflation was the main concern in morning talks among leaders on the EU’s economic situation, but there were also positive comments about growth and the summer tourism season, an EU official said.Inflation in the 19 countries sharing the euro currency has shot to all-time highs above 8% and the EU’s executive expects growth to dip to 2.7% this year.Eurogroup chief Paschal Donohoe warned that the bloc must “acknowledge the risk we could face if inflation becomes embedded in our economies”.According to a draft statement seen by Reuters, EU leaders will say that “in the face of the weaponisation of gas by Russia”, the European Commission should find ways to secure “supply at affordable prices”.”We need to start buying energy collectively, we need to implement price caps and we need to make plans together to get through the winter,” Belgian Prime Minister Alexander De Croo said on Friday as he arrived at the summit.”If we don’t pay attention then the whole EU economy will go into a recession with all its consequences.”The bloc responded to the war with uncharacteristic speed and unity, but some sanctions, such as a planned embargo on Russian oil imports, have repercussions for its economies.EU countries have already poured billions of euros into tax cuts and subsidies to combat surging energy prices.But that adds up to hefty bills for already stretched coffers, leaving many scrambling to find a solution, and EU countries disagree on a bloc-wide solution to address soaring prices.Spain and Portugal capped gas prices in their local electricity market this month, but other states warn price caps would disrupt energy markets and drain state coffers further, if governments had to pay the difference between the capped price and the price in international gas markets. More