Market turmoil triggers recessionary alarms amid worsening US economic data

US equity markets post their worst six-month performance in more than 50 years

A trader at the New York Stock Exchange. US stock markets have had their worst six months in more than 50 years. Reuters

US equity markets have turned in their worst half-yearly performance in more than 50 years.

The three major US indices have dropped from their record highs during the first six months of 2022. The Dow Jones index has fallen 15.6 per cent, while the Nasdaq has plummeted more than 29 per cent, and the S&P 500 has shed more than 20 per cent.

The market turmoil has triggered recessionary alarms — and the case for this continues to gain momentum with deteriorating US economic data on the back of hotter-than-expected inflation and monetary tightening by the US Federal Reserve.

The Atlanta Fed’s GDPNowcast Tracker, an official estimate of gross domestic product growth using similar methodology to the one used by the US Bureau of Economic Analysis, shows that real GDP growth for the second quarter of 2022 is at minus 2.1 per cent, down from minus 1 per cent a month earlier.

Two back-to-back negative GDP prints technically signal a recession.

Once again, the data points due out in July will continue to build on this theme and will give markets more of an idea of how hawkish the Fed will be through the initial stages of the third quarter.

On Wednesday, US data for the services PMI and non-manufacturing PMI will be released.

This will be followed by US inflation data that is due out on July 13 at 4.30pm UAE time.

While expectations are for the core prints to narrow slightly, the overall consumer price index is expected to increase to 8.7 per cent year on year, up from a previous reading of 8.6 per cent.

US industrial production figures and New York Empire State manufacturing are due on July 15 and the month will culminate on July 27 with the Fed's interest rate decision.

Today there is the release of the Federal Open Market Committee (FOMC) meeting minutes for June, where the Fed raised rates by 75 basis points to a range of 1.50 per cent to 1.75 per cent.

While there is no clear indicator as to the size of the rise at the Fed’s July meeting, it is likely that we may be in line for a 50 to 75 basis point rise.

In its latest economic projections, the FOMC had rates at 3.25 per cent to 3.5 per cent by the end of 2022. which would mean that following July’s expected 75 basis points rise, we could be in for another 50 basis point rise in September followed by another 25 basis points in November and December.

On the other hand, If the Fed only raises the rate by 50 basis points in July, we would see 50 basis point increases in September and November, followed by 25 basis points in December.

We also have the all-important non-farm payrolls report scheduled for this Friday.

Markets expect the US labour sector to show more signs of slowing, with 270,000 jobs expected to have been created in June.

This is down from the 390,000 jobs added in May and also below the three-month and six-month averages at 408,000 and 505,000, respectively.

The overall unemployment rate is expected to come in at 3.6 per cent, while year-on-year average hourly earnings are expected to drop to 5 per cent in June, down from a reading of 5.2 per cent in May.

Also due out on Thursday is the meeting minutes from the European Central Bank’s last policy meeting, where rates were held at negative 0.5 per cent for the deposit rate, zero per cent for the main refinancing rate and 0.25 per cent for the marginal lending rate.

The ECB is expected to increase rates by 25 basis points at its July meeting but it will be interesting to see its views on longer-term rates.

The US Dollar Index, a measure of the value of the greenback against a weighted basket of major currencies, crossed 105 for the first time in 20 years.

That’s a gain of almost 10 per cent in the first six months of 2022. I expect the upside move to continue through the summer months — technically, I am seeing a move towards 106.90 levels through the next two months.

Finally, July 11 sees the start of earnings season, where we will get a clearer insight into how companies are dealing with record high inflation.

Gaurav Kashyap is risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers