The fight against inflation intensified this week as central banks stepped up their efforts to rein in rising prices, and a global recession could be the price to pay.
Investors were rattled by the biggest rise in US interest rates in nearly three decades, before Switzerland embarked on a shock hike in borrowing costs, capped by the Bank of America’s fifth straight hike. ‘England.
This wave of rate hikes showed that central bankers are deeply concerned about the threat of runaway inflation and ready to plunge the global economy into a slowdown to calm it down.
This hawkish attitude sent global stock markets tumbling to their lowest point in more than 18 months, in the biggest weekly decline since March 2020 as markets entered “extremely bearish” territory.
The US benchmark S&P 500 index fell into a bear market, 20% from its peak, hammering that markets are in a steep and sustained downturn that could signal a recession.
“The more aggressive line from central banks is adding headwinds to economic growth and equities,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
“The risks of a recession are growing, while achieving a soft landing for the US economy looks increasingly difficult.”
Currency and bond markets were also shaken this week, while oil and copper prices were hit by fears of a slowdown.
The U.S. central bank significantly tightened its resolve with a 75 basis point hike on Wednesday, after an unexpected spike in U.S. consumer prices showed inflation had still not peaked.
Federal Reserve Chairman Jerome Powell denied trying to cause a recession, but said demand needed to be reduced to cool wage increases. Inflation is “very painful for people” and many are only experiencing it seriously for the first time, he told reporters.
Richard Hodges, manager of the $3.6bn (£2.9bn) Nomura Global Dynamic bond fund, said the Fed was orchestrating a recession as it focused solely on curbing US inflation from its 40-year high of 8.6% in May.
The Fed aims to rebalance the gap between post-pandemic pent-up demand and Russia-Ukraine Covid-impeded supply by reducing demand, said Hodges, who predicted higher borrowing costs would quickly hit the US economy. American economy.
“In the latter part of this year, the economy will slow as the American consumer is increasingly squeezed by higher prices, a weak housing market and, to some extent, reduced job security,” added Hodges.
Switzerland’s central bank, the Swiss National Bank (SNB), sent shockwaves through global markets on Thursday with its first interest rate hike since 2007. The move sparked a surge in the Swiss franc and volatility on foreign exchange markets, according to the SNB. he would walk further if necessary.
“It’s probably the SNB that broke the camel’s back, because if the Swiss are worried about inflation, we should all be,” said Jeffrey Halley, senior market analyst at the financial trading firm. Oanda.
Compared to the drama in Washington DC and Zurich, the Bank of England’s quarter-point rate hike on Thursday looked relatively muted. But Threadneedle Street also pledged to act “forcefully” if needed, prompting many economists to predict borrowers could be hit by a half-point hike in August. It would be the biggest rise in UK interest rates since 1995.
Recession fears pushed the pound to its lowest level in two years this week, leaving the pound down around 10% against the US dollar so far this year.
Only the Bank of Japan bucked the trend. He stuck to his ultra-dovish stance on Friday morning – and saw the yen quickly fall 2% to this week’s 24-year low against the US dollar.
A global recession is already ahead, warned Robin Brooks, chief economist at the Institute of International Finance. He said the United States is facing a slowdown in manufacturing and housing.
Despite the fall in stocks this year, stocks may not yet have good value. BlackRock said it was resisting calls to “buy the dip” as valuations hadn’t significantly improved, there was a risk of excessive Fed tightening and pressures on profit margins were mounting.
Mihir Kapadia, CEO of Sun Global Investments, said: “Stocks look pretty cheap on measures such as price-earnings multiples on a historical basis, but the concern now is that a recession is imminent and earnings are the denominator of P/E ratios can drop quite sharply.
Memories of the euro zone crisis returned this week, as the spread between Italian government debt and safe-haven German government debt hit its highest level since 2014.
Fears that heavily indebted Italy is slipping back into the “danger zone” prompted the European Central Bank (ECB) to hold an emergency meeting to discuss ways to calm the bond market rout.
ECB Vice-President Luis de Guindo said a new anti-crisis tool would address the “unwarranted fragmentation” of eurozone members’ borrowing costs.
However, the ECB may struggle to control bond spreads while tightening monetary policy. It could also provoke the ire of Germany if it grants public funding to some eurozone countries without conditions.
“A greater sense of crisis will be needed before policymakers act to address weaknesses in the fabric of the monetary union,” predicted Mark Dowding, CIO of BlueBay Asset Management.
Dowding said confidence in central banks will be needed before markets can stabilize, along with data showing inflation issues have been resolved. He likened the current cycle of rising rates to a visit to the dentist.
“From that perspective, it may be better to take the pain early and do the hike cycle, rather than prolong it. That way the peak can end up being lower than it otherwise would be,” he said.
Cryptocurrency investors have certainly felt numb, after Bitcoin plummeted 30% in a week, crypto lending platform Celsius Network halted withdrawals and cryptocurrency hedge fund Three Arrows Capital n failed to meet margin calls from its lenders.
After booming in the easy money era, crypto assets may not have bottomed yet.
“We are diving into a cold crypto winter, and we haven’t hit the freezing point yet. Rumors and fears are swirling that bitcoin will fall below $20,000 amid heightened financial market volatility and sell-offs in other asset classes,” said Dr. Lil Read, Senior Thematic Analyst at GlobalData.