Recession risks tied to inflation outlook, but OPEC issue could have some effect

With recessionary risks tied to the inflation outlook, global investors resented the fact that peak inflation is not behind us after the headline Eurozone CPI far exceeded expectations. , driving global yields higher as oil rebounds after the Russian oil embargo initially. fanning those fires of inflation.

But fortunately for risk sentiment, there could be some oil supply relief from OPEC.

US stocks were weaker on Tuesday, S&P down 0.6% to end the month more or less where it started. Although there has been a lot of recessionary noise, even stocks are trending back, as is the economic data with the Chicago PMI surprisingly higher.

Meanwhile, public transport will resume in Shanghai and people will be able to move around freely from today, which should hopefully keep risk trading at an even level.

The dollar is a little higher against most G10 and emerging market currencies, but far from its intraday highs after US yields fell on worse than US house price data. expected, which could negatively affect consumer spending. With slowing home sales data and rising mortgage rates, home prices are expected to decline further.

Oil

Oil prices have remained very resilient lately, regardless of the market environment. But there is a lot of good news, especially now with the announcement of the partial EU ban behind us and the reopening of China (at least for now) as we know.

And after a long buying spree before the embargo, given the stretched positioning, oil was poised for a lower correction as traders would eventually look to the economic consequences of higher oil. Still, there was a rush of profit taking after bearish OPEC news broke.

Reports are circulating that OPEC is considering suspending Russia from the oil production deal. And some Persian Gulf members are expected to accelerate production increases if the above suspension is enforced – the anticipation of increased market supply, even after cutting off Russia, could fuel some of this selling. as oil gave up its post-European embargo rebound.

OPEC’s olive branch comes ahead of a potential meeting of Middle East leaders in late June that is expected to be led by Biden and would signal US leadership and commitment to the Middle East when the US is seen as withdrawing from the area.

Meanwhile, EU members are divided over the next step after this latest embargo is implemented. Belgium’s prime minister said it was time to take a break as measures targeting Russian gas would be more complicated, but others said they would have to opt for a full energy embargo.

Forex

Month-end rebalancing flows usually take the market above expectations, so we could see a slight reversal in US Dollar moves from yesterday. Still, economic data and central bank rhetoric are likely to be the main drivers this week.

This is a busy week of data that will shed light on the Fed’s near-term growth and labor market outlook ahead of the June 15 FOMC meeting. The main event will be Friday’s jobs report in May. Typically, but not always, forex markets will reduce the prevailing price bias from the previous week to a significant data point, especially if it can have a significant implication on the FOMC’s rate hike path.

The focus is on Europe

European government bonds plunged after CPI readings from the euro zone and Italy on Tuesday, with distinctly hawkish remarks from the ECB’s Kazimir, who is generally not a notable hawk. But expect more hawks to emerge to bolster their case for a 50 basis point hike in July. The ECB blackout begins on Thursday.

Higher energy prices for longer are a concern for Europe, and with soaring inflation, an excessive tightening of peripheral financial conditions could be unavoidable. Hence the less rebounding euro overnight.

The Russian EU energy embargo will weigh on European growth – and with the ECB bound to raise interest rates to stave off inflation, they would do so in a perfect storm that may leave the hawks of the ECB with eggs in the face due to the economic downturn from higher oil and higher interest rates.

The ECB wants to raise rates to avoid a meltdown in the EURO, but rate hikes alone may not be enough to lift the EURO, especially with France on the brink of a recession.

Gold

Gold is down on higher global yields as central banks around the world don their inflation-fighting hats with 50 basis point hikes, the new normal for the foreseeable future.

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