What we learned about the 1st half of the year, in no particular order:
1)Economic activity is now contracting on an inflation adjusted basis.
2)Headline CPI touched a cycle high of 8.6% in May which was on top of a 5% increase in May 2021. Don’t blame Putin though as January 2022 CPI was up 7.5%.
3)Asset prices reset lower mostly due to multiple compression but credit quality begins to get questioned along with earnings growth.
4)With the cost of capital higher, corporate funding activity slows.
5)The Fed steps up its aggressiveness and the world’s central bankers join up.
6)Goods spending gets a hangover after the two year party.
7)Housing has peaked in terms of the pace of transactions and sharp price growth slows.
8)War is tragic, even more so when instigated by a country that controls so much oil, gas, wheat and fertilizer.
9)Most commodity prices take a breather after the spurt early on.
10)Corporate profit margins begin to soften.
11)US dollar roars higher.
What might be in the 2nd half and my 2 cents, in no particular order:
1)The US economy will continue to shrink on a real basis, a recession is here. Mild or sharp? V bottom or flat line type malaise? I’m not sure.
2)The rate of change in goods prices has peaked and will fall in coming quarters but service inflation, particularly rents, remains sticky, partly offsetting the goods price drop.
3)The bear market will continue, corporate credit spreads will widen further. 4)Capital market access will get more difficult.
5)The Fed will soon shift their focus to rising unemployment and the recession and less to fighting inflation.
6)The bulge of spending on services this summer, particularly on leisure, travel and hospitality, quiets down in the back half.
7)Home prices will fall in some of the hottest markets.
8)Putin won’t stop and energy and food prices will remain high.
9)The BoJ alters its YCC policy.
10)Earnings in 2022 won’t come close to realizing the hopes of analysts as revenue growth slows and profit margins compress further.
11)US dollar peaks as Fed pivots and other central banks continue to catch up with the tightening.
Speaking of the dollar, it is ripping higher again with the euro dipping below $1.03 earlier on the heels of the German trade deficit announced yesterday mostly due to the spike in the value of energy imports.
Speaking of other central banks catching up, the Reserve Bank of Australia hiked rates by 50 bps for the 2nd straight meeting tto 1.35% as expected. Governor Lowe said “Today’s increase in interest rates is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic. The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed.”
On the point above on the changing funding environment, the FT Weekend had an article titled “Fundraising hit by steep decline amid trading rout.” In the piece it said, “Businesses globally raised $4.9T through new equity, loans and bonds in the first half of 2022, down 25% from the $6.6T raised in the first half of 2021, a record setting period, according to data provider Refinitiv.” Also, “Equity financing from companies going public to follow-on stock offerings, convertible bonds and SPAC’s fell nearly 70% to $252b by the end of June, marking the smallest sum raised over the first six months of a year since 2005. The decline was particularly noticeable in the US – where total equity fundraising collapsed to just above $40b, the least since at least 1999, and down from nearly $327b for the first six months of 2021. Just 18 companies listed in the US through traditional IPOs in the second quarter and 14 in Europe.”
Moving on to some data. China’s June services PMI jumped to 54.5 from 41.4 and that was better than the estimate of 49.6 “as the domestic Covid situation improved and containment measures were loosened. New orders also returned to growth, rising modestly overall while the downturn in foreign client demand softened notably.” Looking ahead, “firms remained upbeat in June. That said, the degree of confidence was little changed from May and remained below the series average.” We know the Chinese economy remains in the stop-start mode solely self imposed.
We’ll soon see to what extent the tariffs on China get lifted and as US companies are paying for them, let’s hope as many as possible.
India’s June services PMI rose m/o/m. Singapore’s slipped to 57.5 from 59.4. Markit said “Businesses continued to flourish, supported by strong demand and output growth which were among the highest in the series. That said, supply chain issues could start to constrain growth in Singapore’s private sector. Slight slowdowns in the growth of several indices were recorded in June with some panelists linking this to supply chain disruptions and shipping delays.” On the outlook, “Firms continue to stay hopeful regarding future growth as indicated by the improvement in business confidence recorded in June.” Singapore has benefited from a full reopening and people leaving Hong Kong.
Japan’s services PMI rose to 54 from 52.6 as “remaining domestic Covid restrictions were lifted.” The first print was 54.2. On pricing, “Greater demand for services and rising fuel and raw material prices contributed to a further increase in average input costs, which rose at a record pace. This pushed firms to raise prices charged for services at the quickest rate since October 2019.” The 40 yr JGB yield rose to match its 6 1/2 yr high at 1.41%. This will be very important to watch over the 2nd half, as mentioned above.
The Eurozone services PMI, along with the UK for June were both revised up slightly from the initial print seen a few weeks ago. We know all about the challenges the European economy is facing.
As for European natural gas prices, they continue higher, up another 15% this week.
Dutch TTF Natural Gas Prices