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Global Recession Risk May Be on the Rise, Threatening Stocks

By:Ilya Spivak

Markets shrug as Powell delivers dovish Congressional testimony and soft data looms from China

  • Stock markets remain circumspect as Fed Chair Powell sets the stage for rate cuts.

  • Inflation data from China is likely to show demand remains woefully anemic.

  • Coupled with a turn to weakness in Europe, global recession risk is rising.

Worries about a global economic slowdown may be starting to grip financial markets. Wall Street seems to be reacting with conspicuous concern after Federal Reserve Chair Jerome Powell offered cautiously dovish rhetoric in the first round of semi-annual Congressional testimony.

Stocks have reveled in Fed interest rate cut speculation. Powell seemed to acknowledge the downturn in U.S. economic data over recent weeks, saying that “elevated inflation is not the only risk we face.” In a nod to June’s jobs data, he said the labor market is “not overheated,” adding that “easing too late could unduly weaken the economy.”

Wall Street suspect as Fed’s Powell talks up rate cuts

The response from investors was lukewarm at best. The bellwether S&P 500 erased intraday gains in the wake of Powell’s remarks while the U.S. dollar pushed higher against its major counterparts. Gold and silver prices tellingly struggled for direction while crude oil prices slumped.

Futures-Implied 2024-25 Fed Outlook vs. S&P 500.png

All this seems to make markets appear a bit like the proverbial dog that caught the car. Traders are happy with the prospect of easing on the horizon but tend to shudder when stimulus arrives because that almost assuredly means the central bank has found economic trends negative enough to act.

With that in mind, a sense of growing immediacy in Powell’s rhetoric might have poured cold water on risk appetite. If the U.S. economy is turning lower in earnest, such a response makes sense. Data from China due this week will probably show the world’s second-largest economy is in no position to offer a positive offset to any U.S. weakness.

China and the world economy: No help?

Inflation figures are projected to show consumer prices (CPI) grew just 0.4% year-on-year in June. Meanwhile, producer prices (PPI) are seen falling yet again, though the 0.8% year-on-year decline expected would mark a narrower loss than the 1.4% fall recorded in May.

China Inflation: Consumer & Producer Prices.png

Analytics from Citigroup show China’s economic data outcomes have increasingly soured relative to baseline forecasts over the past three months, with overall news flow now tending toward disappointment. This warns that incoming figures may likewise miss the mark, signaling that demand remains woefully anemic.

Economic conditions in the Eurozone, the third major engine of global demand, have also taken a troubling turn. Leading purchasing managers index (PMI) data showed manufacturing- and service-sector activity growth unexpectedly slowed to the weakest in three months in June.

If all three pivotal economies are misfiring at the same time, global recession fears may build in a hurry. If the Fed chair’s remarks alongside China’s data make such a scenario appear more likely, stock markets and cycle-sensitive commodities may face mounting selling pressure while defensive capital flows send Treasury bonds and the dollar higher.

lya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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