Take five: rising inflation, recession risk and the tanking market

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Central banks are battling inflation and sliding stocks are feeling the heat, leaving investors wondering where the so-called “fed put” has gone.

The minutes of the meeting of the world’s top policymakers may shed some light, as the central banks of New Zealand and South Korea ponder how big their rate hikes need to be in order to keep pace with the Fed. And Washington holds the key to a Russian sovereign default when a key deadline is approaching.

Here’s your look ahead next week from Ira Yosebashville in New York, Kevin Buckland in Tokyo and Dhara Ranasinghe, Beach Chatterjee and Karin Strohecker in London.

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1 / Fed thought

Can the Federal Reserve control the worst U.S. inflation in decades without dragging the economy into recession? The minutes of the bank meeting on May 25 will be given.

Chair Jerome Powell is confident the Fed could achieve a “soft landing” – a word that is a little comforting for the equity market as recessionary warnings come from big Wall Street banks. Following an increase of 75 basis points from March, the Fed is expected to raise another 50 bps in July.

Powell has promised to raise rates as much as necessary to control inflation. The minutes will show how strong policymakers expect inflation and whether growth is resilient enough to face much tighter monetary policy.

2 / Embrace a bear

Wall Street is melting. Major stock market indices occupy bear market territory with the S&P 500 down nearly 19%, the high flying Nasdaq lost more than a quarter from its November 2021 peak. And there’s no respite: Barclays and Goldman have predicted more trouble for equities as corporate margins suffer from rising inflation.

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Sales are extensive. Since bonds topped the bull market in March 2020, a constant 30-year U.S. Treasury bond has lost half its value, safe-haven gold has fallen 6% this quarter. Growing volatility means even the toughest stock pickers are reluctant to take big bets.

Retail and institutional investors are also upset. A U.S. retail investment sentiment index is near its March 2009 low while fund managers have been running their highest cash levels since September 2011.

3 / pivot point

Indexed Purchasing Managers’ Index (PMI) data from the United States, Australia, the United Kingdom, Japan and the eurozone are worth paying attention to. And the central banks are more than usual in the face of rising inflation and its impact on consumers, in view of China’s cowardly-lockdown and a dark increase in losses due to the war in Ukraine.

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China is rapidly recovering from the early 2020 epidemic recession for bumper exports and factory production, but the current recession could be even more difficult to overcome.

As they fight inflation, policymakers could reach a pivot point in the coming months where they have little choice but to focus on the risk of recession. PMIs have held up well recently, but that could show how close that turning point is.

4 / Initial Movers Catching Up

They were early movers, but the race is on for the central banks of New Zealand and Korea to stay ahead of a Fed hot on their heels, including some big step hikes.

The Reserve Bank of New Zealand sharply raised interest rates again by half a point on Wednesday to control inflation, although recent home buyers are feeling the effects of higher mortgage rates, increasing the risk to the economy.

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The governor of Korea’s new central bank rolled the market, flagging a half-point increase ahead of its first meeting on Thursday. Falling behind the curve could crush the fragile victory, pushing up imported food and energy prices.

One of the few remaining holdouts, Bank Indonesia, was advised to stay a little longer during Tuesday’s meeting.

5 / Russia again faces default

The possibility of a Russian sovereign default has returned, with a U.S. license expiring May 25 to allow Moscow to pay.

To circumvent that deadline, Russia said late Friday that it had sent $ 100 million in interest payments on two-dollar bonds. Coupons were issued two days after the deadline

But it must pay more, amounting to just under $ 2 billion by the end of the year, in its international bonds, with the next installment at the end of June.

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But Russia’s 40 40 billion sovereign bond represents just one of many flashpoints, sparking Western sanctions and Moscow’s counter-measures following its February 24 invasion of Ukraine.

There is also pressure on whether gas will flow to Europe as companies fight to make sure they can buy gas legally if they have to pay in rubles, including arrears from May 20. That it would violate its sanctions against Moscow. Russia supplies about 40% of the EU’s gas.

(Compiled by Carin Strohecker; Edited by Toby Chopra)