Stocks Sink, Bonds and the Yen Take Off Amid Recession Fears

RBA meeting, China trade and inflation, BOJ and the yen: Macro Week Ahead

• The Australian dollar may fall farther if a more dovish RBA boosts rate cut speculation.

• The Japanese yen may erase some gains if the BOJ seems less hawkish than expected.

• Downbeat Chinese economic data may amplify growing global recession worries.

A brutal selloff swept financial markets last week as worries about recession gripped investors, as expected. The bellwether S&P 500 stock index shed 2.2% while the tech-tilted Nasdaq 100 slid 3.2%. Treasury bond yields plunged as the markets bet that slowing growth will bring rapid rate cuts, lifting gold and the Japanese yen.

Against this backdrop, here are the macro waypoints likely to shape what comes next.

Reserve Bank of Australia (RBA) policy meeting

Australia’s central bank is expected to keep the target for its benchmark interest rate unchanged at 4.35% when it issues a policy update this week. As it stands, futures markets imply that traders have priced in 20 basis points (bps) in cumulative easing for this year, suggesting an 80% probability of a single 25bps rate cut before the calendar turns to 2025.

Leading purchasing managers index (PMI) data showed that economic activity growth stalled in July, producing the weakest performance since January. That follows three consecutive months of slowdown since service-sector growth peaked in March.

Analytics from Citigroup suggest that Australian macro data outcomes are tending to undershoot median forecasts, meaning that the consensus view of the economy is rosier than reality has ratified. Meanwhile, inflation cooled for the first time in four months in June, coming down to 3.8% year-on-year from a six-month high of 4% in May.

All this might set the stage for a more defensive tone from the RBA, with a bit more of a nod to the need for policy stimulus in the near term. This might inspire a dovish repricing of the baseline policy outlook, weighing on the Australian dollar. It may also add to global slowdown fears as yet another central bank frets about the business cycle.

Bank of Japan summary of opinions

Japan’s central bank will release a summary of the opinions discussed at its fateful meeting in July, when it surprised the markets with a 15bps rate hike. BOJ Governor Kazuo Ueda interestingly flagged the yen’s dramatic depreciation in the first half of the year in explaining the move.

By the time the central bank acted, the yen had already notched up a spirted 6% recovery against the U.S. dollar. Since then, it has added a further 5% as global yields drop amid global recession fears, as expected. With that in mind, traders will be keen to gauge how much of the BOJ’s hawkish stance hinges on the exchange rate.

Japanese inflation seems to be underpinned by food and energy prices, where the influence of high import costs courtesy of the weak yen is especially pronounced. If it appears that the BOJ is content with domestic price trends, once the currency is accounted for, its recent rebound may imply limited scope for further action. That might cool yen gains a bit.

China trade and inflation data

China is due to report July’s trade balance as well as producer and consumer price statistics (PPI and CPI, respectively). Export and import growth is seen accelerating from the previous month while the headline inflation gauge ticks higher to 0.4% year-on-year from 0.2% in the prior month.

Citigroup data suggests Chinese economic figures have increasingly deteriorated relative to baseline forecasts over recent weeks. That may set the stage for downside surprises that underscore the anemic state of the world’s second-largest economy. Such outcomes might amplify the risk-off tone across global markets as recession worries swell.

Ilya 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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