Stock Market Rebound May Fizzle as Global Recession Worries Swell Anew

Active investors found little to celebrate in U.S. CPI data. Signs of a global slowdown may spell trouble ahead.

• U.S. CPI data left Wall Street steady but flags slowing demand dynamics.
• Global economic news-flow increasingly warns of broad-based deceleration.
• Markets may struggle with upbeat Japanese GDP data on hawkish BOJ bets.

Stock markets offered a lukewarm reaction to slightly cooler U.S. inflation data than economists expected. A much-anticipated consumer price index (CPI) report showed headline price cooled to 2.9% year-on-year in July. The core reading excluding volatile energy and food prices ticked down to 3.2%.

While these outcomes constituted the lowest readings in three years—a meaningful milestone for the Federal Reserve in its battle to bring prices to heel after the COVID-19 pandemic—they were broadly in line with economists’ expectations ahead of the release. That seemed to leave Wall Street without a lasting directional lead.

U.S. CPI data adds to evidence of slowing global demand

The Bureau of Labor Statistics (BLS) said an increase in the shelter component tracking housing costs accounted for 90% of the 0.2% monthly rise in overall CPI. New and used vehicle prices marked the most pronounced price declines. Overall, the pace of year-on-year inflation cooled in almost every major spending category compared with June.

Taken together, the report’s broad tilt to disinflation appears to confirm ebbing consumer demand dynamics foreshadowed in July’s producers’ price index (PPI) data published yesterday. This comes after another batch of global economic updates pointing to decelerating growth.

The Reserve Bank of New Zealand (RBNZ) surprised the markets with an interest rate cut today. The central bank lowered its cash rate by 25 basis points (bps) to 5.25%, while slashing growth and inflation forecasts. It now expects a local recession in the second half of the year, slashing annual inflation to 2.3% from an average of 3.7% in the first half.

Meanwhile, July’s U.K. consumer price index (CPI) printed lower than expected at 2.2% year-on-year, while declines in confidence were measured in Australia, Germany and Eurozone-wide. Chinese credit growth data disappointed, with new loans unexpectedly posting the weakest rise since October 2009 at 260 billion yuan ($36.4 billion).

Stocks may struggle if U.K. GDP and U.S. retail sales data disappoint

Evidence of a slowdown may compound if U.K. gross domestic product (GDP) and U.S. retail sales figures underwhelm. The former is seen rising 0.6% in the second quarter – a slight slowdown from the 0.7% rise in the first one. The latter is penciled in for an increase of 0.3%, a modest pickup after receipts growth stalled in June.

Analytics from Citigroup show that U.S. economic news flow has increasingly disappointed relative to consensus forecasts since mid-April. A similar turn toward weakness has played out in U.K. results, and at a worldwide level. The bank’s global economic surprise index has dropped to the lowest point in over two years.

Leading purchasing managers index (PMI) data from S&P Global already shows that manufacturing- and service-sector economic activity growth has cooled globally over the past two months. Stock markets may be back on defense if incoming releases continue in the same direction, stoking recession fears.

Japanese growth pickup may feed BOJ appetite for rate hikes

A pickup in Japanese economic growth may not be helpful in this context. Incoming GDP data is expected to show acceleration in the second quarter, with output rising at an annualized pace of 2.1%. That would mark the strongest expansion in a year.

Leaving aside the onset of the COVID-19 pandemic in 2020, the three months through June appear to have some positive seasonality. That may be linked to an upswell of demand as new outlays are made following the rolling over of Japan’s fiscal year, which begins in April.

Still, an upbeat result coupled with solid PMI activity readings into the second half of the year may help reinforce a hawkish bias at the Bank of Japan (BOJ). News that dovish Prime Minister Fumio Kishida will not seek reelection may set the stage for more BOJ-supportive fiscal leadership. All this may sting stocks and breathe new life into the Japanese yen.

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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