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Economy

UK economy shrinks in March as recession risks mount

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© Reuters. FILE PHOTO: People walk and stand by the temporary fencing around the perimeter of Trafalgar Square, to prevent crowds gathering on New Year’s Eve, in London, Britain, December 31, 2021. REUTERS/May James

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By David Milliken and William Schomberg

LONDON (Reuters) -Britain’s economy unexpectedly shrank in March, marking a weak end to the first quarter of a year when the risk of recession is looming and increasing pressure on the government to offer more support to inflation-hit households.

Gross domestic product fell 0.1% from February, hurt by a slump in car sales due to supply-chain problems, the Office for National Statistics said.

That left growth in the first three months at 0.8%, weaker than the Bank of England’s 0.9% forecast and the 1.0% median forecast by economists polled by Reuters.

The January-March period is likely to mark a high point for the year, with households facing their biggest squeeze on disposable income in decades as the policy dilemma facing a BoE intent on keeping a lid on inflation – while not choking off prospects for growth altogether – deepens.

Last week, the central bank forecast inflation will surpass 10% in the final quarter of 2022, up from 7% in March, already more than three times its 2% target.

“The economy had less momentum than we thought even before the full hit from the cost of living crisis has been felt,” Paul Dales, chief UK economist at Capital Economics, said. “The risk of recession has just risen.”

Sterling weakened against the dollar on Thursday while British government bond yields slumped to their lowest in nearly two months.

PRESSURE FOR MORE SUPPORT

The government is under pressure to provide more support to households. Finance minister Rishi Sunak said that, while the recovery was being disrupted by Russia’s invasion of Ukraine, he was open to offering more help, with regulated energy tariffs expected to rise by around 40% more in October.

Britain’s economy outpaced the United States and the euro zone in the first quarter, although this partly reflected an earlier start and end to the Omicron wave of COVID-19, and differences in the timing of energy price rises.

The International Monetary Fund predicts Britain will see the weakest growth and highest inflation among major advanced economies next year.

Much of Britain’s recovery reflects greater spending on healthcare – up 11% since the start of the pandemic – while consumer services remain 7% below their pre-pandemic level.

“Given that inflation looks set to remain red-hot for some time, how the consumer fares will remain the key question for those monitoring the UK economy for some time to come,” said Sandra Horsfield, an economist at Investec.

In March alone, sales of cars and motor vehicles slumped by 15.1%, leading to a 0.2% fall in overall services output.

The fall in GDP would have been even greater had it not been for an unusually strong 1.7% rise in construction output, reflecting repair work after winter storms in February.

February’s GDP growth was revised down to zero from 0.1%.

The BoE worries that slower growth will not be enough on its own to bring inflation back to its 2% target, and that the leap in inflation will get embedded in longer-term pricing plans and pay settlements.

It has therefore raised interest rates four times since December to tackle inflation pressures, and financial markets expect rates to rise to 2% by the end of this year from 1% now.

Wage pressures remained strong in April although hiring slowed, according to data overnight from recruiters, while house prices rose by the most since June, despite a big overall fall in consumer sentiment.

The world’s fifth-biggest economy shrank by 9.3% in 2020 and grew by 7.4% in 2021, the sharpest COVID swing in output of any G7 economy. Overall GDP, on a monthly basis, is now 1.2% above its pre-COVID level of February 2020.

Economy

As bear market looms, battered Wall St seeks elusive ‘Fed put’

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© Reuters. FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 21, 2022. REUTERS/Brendan McDermid

By David Randall

NEW YORK (Reuters) -The Federal Reserve’s determination to raise interest rates until it squashes the highest inflation in decades is darkening the outlook across Wall Street, as U.S. stocks stand on the cusp of a bear market and warnings of a recession grow louder.

At issue is the so-called Fed put, or investors’ belief that the Fed will take action if stocks fall too deeply, even though it has no mandate to maintain asset prices. One oft-cited example of the phenomenon, which is named after a hedging derivative used to protect against market falls, occurred when the Fed halted a rate hiking cycle in early 2019 after a stock market tantrum.

This time around, the Fed’s insistence that it will raise rates as high as needed to tame surging inflation has bolstered the argument that policymakers will be less sensitive to market volatility – threatening more pain for investors.

A recent survey by BofA Global Research showed fund managers now expect the Fed to step in at 3,529 on the S&P 500, compared with expectations of 3,700 in February. Such a drop would constitute a 26% decline from the S&P’s Jan. 3 closing high.

The index, which closed Friday at 3,901.36, is already down almost 19% from that high this year on an intraday basis – close to the 20% decline that would confirm a bear market, according to some definitions. [.N]

“The Fed has bigger fish to fry and that’s the inflation problem,” said Phil Orlando, chief equity market strategist at Federated Hermes (NYSE:FHI), who is increasing his cash levels. “The ‘Fed put’ is kaput until the central bank is confident that they’re no longer behind the curve.”

As a result, some investors are digging in for a long slog. BofA’s survey showed cash allocations at a two-decade high, while bets against technology stocks stand at their highest since 2006.

Strategists at Goldman Sachs (NYSE:GS), meanwhile, earlier this week published a “Recession manual for US equities” in response to client inquiries on how stocks will perform in a downturn. Barclays (LON:BARC) analysts said that numerous negative near-term catalysts mean the risks for stocks “remain firmly stacked to the downside.”

The S&P 500 closed broadly unchanged on Friday, reversing a sharp intraday decline that had briefly put it into bear market territory. The index marked its seventh straight week of losses, the longest streak since 2001.

Jason England, global bonds portfolio manager at Janus Henderson Investors, believes the index needs to fall at least another 15% for the Fed to slow its tightening, given that unprecedented monetary policy support helped stocks more than double from their March 2020 lows.

“The Fed is being very clear that there will be some pain ahead,” he said.

The Fed has already raised rates by 75 basis points and is expected to tighten monetary policy by 193 basis points this year. [/FEDWATCH] Investors will get more insight into the central bank’s thinking when minutes from its last meeting are released on May 25.

2018 REDUX?

Some worry the Fed risks exacerbating volatility if it does not heed possible danger signs from asset prices. Analysts at the Institute of International Finance said stocks may be subject to the same type of selling that rocked markets in late 2018, when many investors believed the Fed tightened monetary policy too far.

“In the past, rising uncertainty and mounting recession risk have had important effects on investor psychology, making markets less tolerant of monetary policy tightening that is seen as no longer warranted,” IIF analysts wrote on Thursday. “The risk of a similar market tantrum (to 2018) is rising again now as markets fret about global recession.”

There have been signs of resilient sentiment among investors. For example, the Cboe Volatility Index, known as Wall Street’s fear gauge, is elevated but below levels it reached during previous major selloffs.

And the ARK Innovation Fund (ARKK.K), which became emblematic of the pandemic rally, has brought in net positive inflows of $977 million over the last six weeks, Lipper data showed. The fund is down 57% in 2022.

While some investors say those are signals that markets are yet to bottom, others are more hopeful.

Terri Spath, chief investment officer at Zuma Wealth, believes some investors are re-entering parts of the stock market that have suffered outsized losses.

“The Fed is already seeing signs that they won’t be needed as a buyer of last resort,” she said.

Analysts at Deutsche Bank (ETR:DBKGn) are less optimistic.

“The Fed having badly erred on the side of excess inflation in 2020/21, cannot afford to make the same mistake twice – which favors more financial conditions tightening, and ongoing high (volatility) panicky markets,” they wrote.

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Economy

Australian prime minister concedes defeat in election

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© Reuters. FILE PHOTO: Australian Prime Minister Scott Morrison attends the third leaders’ debate at the Seven Network Studios during the 2022 federal election campaign, in Sydney, Australia May 11, 2022. Mick Tsikas/Pool via REUTERS

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SYDNEY (Reuters) – Australian Prime Minister Scott Morrison said he had conceded defeat in a national election on Saturday, saying that while vote counting was incomplete the opposition Labor party looked likely to form a government.

“Tonight I have spoken to the Leader of the Opposition and the incoming Prime Minister, Anthony Albanese, and I’ve congratulated him on his election victory this evening,” Morrison said at a televised speech in Sydney.

Morrison added that he would stand down as leader of the Liberal party.

The capitulation ends eight years and nine months in power for Morrison’s conservative coalition. Morrison became prime minister in 2018 after several leadership changes.

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Economy

Bear market beckons as stock volatility continues in 2022

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© Reuters. FILE PHOTO: A trader works on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., May 20, 2022. REUTERS/Andrew Kelly

By Lewis Krauskopf

NEW YORK (Reuters) – The stock market’s brutal year neared a grim milestone as the S&P 500’s slide on Friday threatened to leave it in a bear market for the first time since March 2020, fueled by worries over sky high inflation, a hawkish Federal Reserve and future economic growth.

The benchmark S&P 500 index fell below 3837.248 during Friday’s session, a decline that on an intraday basis put it more than 20% below its Jan. 3 record closing high. However, the index closed above that level, and did not confirm it was in a bear market – frequently defined as a drop of at least 20% from a closing high.

If history is any guide, a bear market would mean more pain could be in store for investors. The S&P 500 has fallen by an average of 32.7% in 13 bear markets since 1946, including a nearly 57% drop during the 2007-2009 bear market during the financial crisis, according to Sam Stovall, chief investment strategist at CFRA.

It has taken a little over a year on average for the index to reach its bottom during bear markets, and then roughly another two years to return to its prior high, according to CFRA. Of the 13 bear markets since 1946, the return to breakeven levels has varied, taking as little as three months to as long as 69 months.

Graphic: S&P 500 bear markets since 1946 – https://graphics.reuters.com/USA-STOCKS/BEAR/zjvqkmznwvx/chart.png

The S&P 500 surged some 114% from its March 2020 low as stocks benefited from emergency policies put in place to help stabilize the economy in the wake of the COVID-19 pandemic.

That decline went into reverse at the start of 2022 as the Fed grew far more hawkish and signaled it would tighten monetary policy at a faster-than-expected clip to fight surging inflation. It has already raised rates by 75 basis points this year and expectations of more hikes ahead have weighed on stocks and bonds.

Fed Chairman Jerome Powell has vowed to raise rates as high as needed to kill inflation but also believes policymakers can guide the economy to a so-called soft landing.

Adding to the volatility has been the war in Ukraine, which has caused a further spike in oil and other commodity prices.

Graphic: S&P 500 timeline in 2022 – https://fingfx.thomsonreuters.com/gfx/mkt/jnvwezxjgvw/Pasted%20image%201653063479826.png

A few areas of the stock market have been spared. Energy shares have soared this year, along with oil prices, while defensive groups such as utilities have held up better than broader markets.

Graphic: S&P 500 sectors since all-time high – https://graphics.reuters.com/USA-STOCKS/BEAR/znpnemwbdvl/chart.png

On the flip side, shares of technology and other high-growth companies have been hit hard. Those stocks — high fliers during much of the bull market over the past decade — are particularly sensitive to higher yields, which dull the allure of companies whose cash flows are weighted more in the future and diminished when discounted at higher rates.

Some of the biggest of these companies, such as Tesla (NASDAQ:TSLA) and Facebook (NASDAQ:FB) owner Meta Platforms, are also heavily weighted in the S&P 500 index.

Graphic: Casualties in 2022 stock market – https://graphics.reuters.com/USA-STOCKS/BEAR/egpbkwajjvq/chart.png

Investors have looked at various metrics to determine when markets will turn higher, including the Cboe Volatility Index, also known as Wall Street’s fear gauge. While the index is elevated compared to its long-term median, it is still below levels reached in previous major selloffs.

Graphic: VIX and bear markets – https://fingfx.thomsonreuters.com/gfx/mkt/xmpjoxrbyvr/Pasted%20image%201653068998738.png

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