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LGT Navigator: Powell reaffirms commitment to inflation fight and dampens recession fears

June 23, 2022

Federal Reserve Chairman Powell stressed that the US economy is robust and can certainly withstand tighter monetary policy. However, he said the Fed would continue to fight high inflation and raise interest rates further. Fears of monetary policy overshooting and a subsequent global recession remain palpable in the capital markets. The focus of economic and geopolitical attention now turns to the summit of EU heads of state and government and the G7 summit on Sunday.

Powell reaffirms commitment to inflation fight and dampens recession fears

While in Europe stock indices trended clearly negative at midweek – the EuroStoxx 50 closed -0.84% lower and the British FTSE 100 fell by -0.88% – the Dow Jones Industrial closed only slightly lower at 30'483.13 points (-0.15%) after initial losses of a good one percent . The S&P 500 ended the session -0.13% lower at 3'759.89 points and on the Nasdaq, the indices posted moderate daily losses of around -0.15%. The crash of the Bitcoin and other cryptocurrencies also continues to provide food for thought. The Bitcoin fell at times again below the mark of USD 20'000.

In Asia, most stock markets trended in positive territory today. In Tokyo, the Nikkei 225 index trades moderately up at +0.2%, while the Hang Seng in Hong Kong can increase by just under +1%. In Shanghai, the Composite Index is up about +0.6%.

Fed reaffirms interest rate outlook and sees no explicit risk of recession

Fed Chairman Jerome Powell expressed confidence at the regular hearing in the US Senate and said that the US economy can cope well with the interest rate turnaround. The highest ranking US central banker thus does not appear to see any explicit risk of recession at present. The Fed's priority, however, is the fight against the high inflation rate. Therefore, further interest rate steps are to be expected. The rate hikes already priced in by financial markets are also appropriate, Powell said. The yield on ten-year US government bonds fell further and is now quoted at 3.16%, well below the eleven-year high of 3.49% observed last week.

Euro area consumers more pessimistic

Consumer sentiment in the euro area countries deteriorated further in June. The indicator fell by 2.4 points from an already low level to minus 23.6 points. The indicator published by the EU Commission is thus only slightly above the record low registered in April 2020.

Unchecked inflation in the UK, despite monetary policy countermeasures

Despite three interest rate hikes by the Bank of England, inflationary pressure on the British Isles has increased further. On an annual basis, consumer price inflation rose from +9.0% to +9.1% in May, once again the highest rate of increase since 1982. The UK inflation rate is thus also the highest within the G7. Rising food prices are currently the strongest driver. The British central bank expects inflation to exceed 9% in the coming months, before peaking at just over 11% in October. Brexit also plays a weighty role as the economy is more focused on the domestic market, which has a negative impact on productivity and wages in the long-term, respectively driving up inflation.

Prices in the UK also continue to rise strongly at producer level. Year-on-year, producer prices rose by +22.1% in May – the strongest increase since records began in 1985.

KOF sees Swiss economy still on growth path – but recession risk increasing

The economic research unit of the ETH (KOF) has revised its economic forecasts for the current and next year downwards. Although the Swiss gross domestic product is expected to grow, a recession cannot be ruled out, the economists said. In its current forecast, KOF assumes GDP growth of +2.8% this year (previously +3.0%) and +1.3% next year (+2.0%). In addition to the Ukraine war, inflation is also highlighted as a significant economic risk. In the current year, KOF expects consumer price inflation of +2.6% (previous forecast +1.9%). Next year, a slowdown to +1.5% is then expected (previously +0.7%). If inflation in Europe and the US continues to rise sharply and forces the central banks to raise key interest rates quickly and sharply, a recession in the global economy should be expected at the beginning of 2023.

Economic Indicators June 23

MEZ Country Indicator Last period
08:45 FR Economic Survey (June) 106.0
09:00 SZ KOF Economic Indicator (June) 96.8
09:15 FR PMI Composite (June) 57.0
09:30 GE PMI Composite (June) 53.7
10:00 EZ PMI Composite (June) 54.8
10:00 EZ ECB Monthly Bulletin
10:30 UK PMI Composite (June) 51.8
12:00 EZ EU State and Government heads meeting
14:30 US Initial Jobless Claims (weekly) 229,000
15:45 US PMI Composite (June) 53.6
16:00 US Fed Governor Powell speaks
16:30 GE Bundesbank President Nagel speaks
22:30 US Fed Bank Stress Test results

 

Earnings Calender June 23

Country Company Period
US FedEx Q4

 

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Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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