S&P: world economy at risk due to double whammy of inflation and geopolitics
Standard & Poor’s sees two world economies at risk:
- Structural inflationary pressures that require a stronger and prolonged central bank response in monetary policy;
- the protracted war between Russia and Ukraine, which exacerbates the ongoing energy crisis and increases risk aversion.
In its latest report titled “Global Credit Conditions Downside Scenario: Inflation, Geopolitics — A Double Threat to Our Baseline Scenario,” the rating agency developed a downside scenario based on a consistent set of negative projections presented for major areas of the economy between 2022 and 2025.
It’s a scenario that S&P estimates has “about a one in 3 chance” of materializing, and in which Europe would suffer the most. Also, the US economy is at risk. In 2023, growth in the euro currency area will be 90 basis points weaker than in the baseline scenario, and Germany could experience a prolonged recession, characterized by a 1.2 percentage point decline in growth in 2023 and 90 basis points in 2024. The S&P 500 would decline.
In this case, German inflation would be 1 to 2 percentage points higher than in the baseline scenario in 2023 and would gradually decline, remaining above target level until 2025.
In the U.S., the S&P scenario suggests that inflation would remain elevated even longer, prompting the Federal Reserve to continue raising the rate sharply, exacerbated by the decline in pandemic-related savings and the continued decline in consumer spending between mid-2023 and early 2024.
With the gradual rate hike, the macroeconomic picture in the U.S. also changes, where the S&P baseline scenario expects a shallow recession and the worst-case scenario expects it to deepen and last longer, leaving GDP in 2023 below our baseline forecast of a 0.1% contraction.
On the other hand, the combination of slowing external demand and weakening confidence will have a greater impact on countries such as South Korea and Taiwan, where exports play a more important role.
Earlier, we reported that JPMorgan talked about the “Armageddon Scenario”.
Global shares edge up as Fed pause bets bolster sentiment
Global equities were set for a small weekly gain on Friday following a Wall Street rally overnight, as rising bets the Federal Reserve will skip a rate increase next week overshadowed worries about U.S. markets being drained of cash.
MSCI’s broad index of global shares edged 0.2% higher, on track for a weekly rise of 0.6%.
Europe’s Stoxx 600 equity gauge was flat, following a 2% jump in Japan’s Nikkei, which rebounded strongly after its plunge from a 33-year high in the previous session.
Traders now lay 73% odds on the Fed keeping rates steady on June 14, in a range of 5%-5.25%, pausing its most aggressive hiking cycle since the 1980s.
Bets for a pause were supported by data overnight showing the number of Americans filing new jobless claims surged to a more than 1 1/2-year high, indicating a loosening labour market that could further quell inflation.
Investors also hope the Fed will pause its rate rise campaign as a quirk of the U.S. debt ceiling negotiations has posed a potential a threat to market liquidity.
The U.S. government is expected to rush to sell short term debt to replenish its Treasury General Account, potentially at yields so high that banks raise deposit rates to compete for funding, reducing interest in riskier assets like equities.
“We’re all worried about liquidity,” said Ben Jones, director of macro research at Invesco. The Fed, he added, “still wants to tighten,” policy and therefore may allow the TGA rebuild to drain liquidity from markets without stepping in to provide other support tools.
This fear was not dominating trading on Friday, however.
On Wall Street overnight, gains were led by the tech-heavy Nasdaq, which surged 1.27%.
The broader S&P 500 rose 0.62%. Its gains put the benchmark index up 20% from its Oct. 12 closing low and heralded the start of a new bull market, at least by the definition of some market participants.
On Friday, e-mini U.S. equity futures pointed to a steady start for each of the indices.
Fed Chair Jerome) said on May 19 it was still unclear if U.S. interest rates will need to rise further, and the risks of overtightening or undertightening had become more balanced.
Two-year Treasury yields, which are extremely sensitive to monetary policy expectations, rose about 3.5 basis points (bps) to around 4.55%. The 10-year yield edged up to 3.749% after tumbling 7 bps overnight.
The U.S. dollar index, which measures the currency against a basket of six major peers, rebounded 0.2% to 103.52.
The euro slipped 0.15% to $1.0765, just below Thursday’s two-week high of $1.0787.
Elsewhere, the Turkish lira extended its decline to a new record low of 23.5 per dollar, even as President Tayyip Erdogan’s appointment of a U.S. banker as central bank chief sent a strong signal for a return to more orthodox policy.
Erdogan had last week put well-regarded former finance minister Mehmet Simsek back in the post. Simsek said this week that the guiding principles for the economy would be transparency, consistency, accountability and predictability.
Leading crypto asset bitcoin briefly dipped before recovering to trade 0.5% firmer at $26,637 after crypto exchange Binance said it was suspending dollar deposits and would soon pause fiat currency withdrawal channels following a U.S. Securities and Exchange Commission crackdown.
Crude oil remained on the back foot after a report that the United States and Iran were close to a nuclear deal, although denials from both parties kept it off the previous session’s lows.
The prospect of a deal, which reportedly includes scope for an additional 1 million barrels per day of Iranian production, had knocked down West Texas Intermediate (WTI) crude by $3.50 to just shy of $69 at one point on Thursday.
WTI futures fell 0.3% to $71.09. Brent crude futures were off by the same amount at $75.75.
China’s CPI expected to rise in H2: central bank governor
China’s year-on-year consumer inflation is projected to rise gradually in the second half of the year while, mainly due to base effects, second quarter economic growth is expected to be high, according to the central bank governor.
At present, China’s economy is recovering from the impact of COVID-19, and the balance sheets of its market entities are being repaired, the People’s Bank of China said in a statement on Friday, citing governor Yi Gang.
China’s biggest state banks cut deposit rates
China’s biggest banks on Thursday said they have lowered interest rates on yuan deposits, in actions that could ease pressure on profit margins and reduce lending costs, providing some relief for the financial sector and wider economy.
Industrial and Commercial Bank of China Ltd, Agricultural Bank of China (OTC:ACGBF) Ltd, Bank of China Ltd and China Construction Bank (OTC:CICHF) Corp all cut their rates from Thursday, websites from each bank showed.
The state-backed banks cut rates on demand deposits by 5 basis points and three-year and five-year time deposits by 15 basis points.
This is the second such cut within a year, with previous action taken in September.
“The deposit rate cuts will push savings into consumption and investment and ease the pressure on banks’ net interest margins (NIM), opening the door for further monetary stimulus,” said Gary Ng, Asia Pacific senior economist of Natixis.
He expects a 50 basis points cut in the reserve requirement ratio (RRR) soon to support local government bond issuance. But additional loan prime rate cuts will only come if economic data or financial risks deteriorate to a level that prevents China from meeting its 5% target, said Ng.
China cut the RRR in March but has kept its benchmark lending rate unchanged this year, as widening yield differentials with the United States limited the scope for substantial monetary easing.
Major state banks’ net interest margins have shrunk following pressure to lower borrowing cost for individuals and businesses to stimulate the economy, and as credit demand remains subdued.
China’s economy rebounded faster than expected in the first quarter but lost momentum at the beginning of the second, grappling with tumbling exports, a sluggish housing market and a high unemployment ratio.
A regulatory body overseen by the People’s Bank of China has asked the lenders to also lower U.S. dollar deposit rates, four people with direct knowledge of the matter said on Tuesday.
The benchmark CSI Banks Index rose 0.35% in morning trading on Thursday.
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