Recession concerns prompt risk aversion flows

Notes/Observations

- Risk aversion flows pick up amid growing global recession fears; Tighter financial conditions poised to weigh on economic growth as central banks appeared to be compelled to act (UK May CPI at fresh 40-year high; South Africa CPI moved above target range).

-Markets sell off amid a continuation of diverging inflation/growth indications that triggered further risk aversion. Asia closed lower by 0.2-2.4% with bond yields declining. EU indices have opened sharply lower by 0.5-2.3%. EU bond yields are much lower. Elsewhere Gold -0.7%, BTC -5.2%, ETH -7.3%, DXY +0.2%, Brent -4.1%, WTI -4.7%.

-Sentiment and consumer confidence plunges further as the Netherlands reports the lowest consumer confidence reading since records began at -50. In line with the negative outlook, both Sweden and Switzerland cut their GDP forecast and raised CPI forecasts. Not only reinforcing stagflation, but accelerating a diverging pattern into economic distress.

-In the UK, CPI matched estimates at 40 year highs of 9.1% Y/Y. PPI read significantly higher than forecast. In the railway union standoff, UK Dep PM Raab fought back against the union’s demands and suggested that giving into their requests would add to inflation.

-Concern around EU gas supplies has been elevated this morning after IEA's Birol said in an article in the FT that Europe needs to prepare for a complete cut off of Russian gas exports, citing that Russia will continue to double down on using it as leverage. Volkswagen CEO reiterated the concern in his own remarks..

-In an economic forum in Qatar, multiple travel and hospitality CEO's have spoken. Including Accor, Marriot, Trip.com, IAG and Boeing. The theme was unanimous in the increasing trend around combined travel for both leisure and business, referencing remote working as the catalyst. All companies saw the high demand continuing for the foreseeable future while Boeing advised of ongoing supply chain issues while IAG experiences staff shortages, echoing a global aviation issue.

Asia

- Japan Govt Spokesperson Kihara declined to comment on JPY currency moves, Noted dramatic FX movement was not ideal; Govt to make utmost effort to implement planned inflation policies step by step.

- BOJ Apr Meeting Minutes (two decisions ago) noted that Board members agreed to no change to its stance for taking additional easing steps without hesitation if needed. Several members noted that FX should move in stable manner reflecting fundamentals. Also stressed that BOJ should communicate to markets that monetary policy was conducted to achieve price stability not control FX moves.

Europe

- France Central Bank (BdF) updated itss economic outlook; raises inflation and cuts growth outlook. Raised the 2022 inflation forecast from 3.7% to 5.6%and raised 2023 inflation from 1.9% to 3.4%. Cut 2022 GDP growth forecast from 3.4% to 2.3% and also cut the 2023 GDP growth forecast from 2.0% to 1.2%.

- Italy Foreign Min Di Maio left the Five Star Movement party and form new group of lawmakers that will support PM Draghi in Parliament (** Reminder: Di Maio and Five Star leader Conte have disagreed on military aid to Ukraine.

Americas

- Treasury Sec Yellen stated she believed there was a path to bringing down inflation while maintaining strong labor market; Most economist did not believe US would enter recession because they were taking into account unique postpandemic features.

- Fed's Barkin (non-voter, hawk) stated that Inflation was high and broad based. Believed persistent Inflation should come down over time, but it would take time; Fed had made clear it would do what it took to cut inflation.

Energy

- Italy govt said to prepare new €3.0B in aid to to reduce the increase of energy bills.

- IEA's Birol: Europe should be ready in case Russian gas is completely cut off. Russia’s decision to reduce European gas supplies might be a precursor to further cuts as Russia looks for leverage over war with Ukraine.

Speakers/Fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -1.54% at 402.30, FTSE -1.20% at 7,066.18, DAX -2.29% at 12,988.09, CAC-40 -1.19% at 5,857.66, IBEX-35 -1.72% at 8,094.15, FTSE MIB -2.41% at 21,558.00, SMI -0.65% at #, S&P 500 Futures -1.67%].

Market Focal Points/Key Themes: European indices open lower across the board and fell further as the session wore on; all sectors start the day in the red; least negative sectors include consumer discretionary and telecom; sectors leading to the downside include materials and energy; oil & gas subsector lower following drop in Brent price; Frasers raises stake in Boss; focus on testimony from Fed Chair Powell before Congress, and presser by President Biden expected to call for gas tax holiday later in the day; earnings expected during the upcoming US session include Winnebago and KB Home.

Equities

- Consumer discretionary: Hugo Boss [BOSS.DE] +1%, Frasers [FRAS.UK] -1% (Frasers raises stake in Hugo Boss), JD Sports Fashion [JD.UK] +3.5% (earnings).

- Energy: Saipem [SPM.IT] -15% (capital raise).

- Financials: Natwest [NWG.UK] +3% (UK govt extends trading plan).

- Industrials: Daimler Truck [DTG.DE] -4% (affirms outlook), BASF [BAS.DE] -5% (CEO interview).

- Materials: Umicore [UMI.BE] -15% (strategy update).

Speakers

- ECB's Villeroy (neutral, France): Region should avoid recession. To do what was needed to achieve the inflation target for 2024.

- ECB's De Guindos (Spain, neutral): inflation to stay near current levels over coming months. Then ease after the summer. Size of Sept rate hike hinged on inflation expectations. New anti-fragmentation tool will be different in nature from OMT, PEPP or APP programs.

- ECB’s Elderson (Netherlands, SSM) noted that banking sector was making tangible progress with their climate agendas.

- Iceland Central Bank (Sedibanki) Policy Statement noted that monetary stance would likely have to be tightened even further to ensure inflation eased back to target. Signs that domestic activity would remain strong, Q1 GDP growth to be above prior forecasts.

- China Foreign Ministry spokesman Zhao Lijian noted that had no information on possible US Pres Biden and Pres Xi call; Important for the leaders to talk.

- President Biden said call on Congress on Wed, June 22nd to pass a 3-month suspension of the federal gasoline tax to help combat pump prices.

Currencies/fixed income

- Risk aversion flows kept the USD firmer. Tighter financial conditions poised to weigh on economic growth as central banks appeared to be compelled to act.

- GBP was softer after UK inflation data. Dealers noted that the May COI reading might encourage BOE to continue with 25bps hikes at its next meeting in August rather than upping the ante with a 50bps hike.

- JPY continued to hit fresh 24-year lows in the aftermath of BOJ keeping its Yield Control intact last week while other central bank continued with rate hikes. Verbal intervention by various Japanese officials having diminishing impact to curtail yen weakening.

Economic data

- (NL) Netherlands Jun Consumer Confidence: -50 v -47 prior.

- (NL) Netherlands Apr Consumer Spending Y/Y: 14.8% v 11.2% prior.

- (UK) May CPI M/M: 0.7% v 0.7%e; Y/Y: 9.1% v 9.1%e (10th month above target and highest annual pace since Nov 1981); CPI Core Y/Y: 5.9% v 6.0%e; CPIH Y/Y: 7.9% v 7.8%e.

- (UK) May RPI M/M: 0.7% v 0.5%e; Y/Y: 11.7% v 11.4%e; RPI-X (ex-mortgage Interest Payments) Y/Y: 11.8% v 11.5%e; Retail Price Index: 337.1 v 336.2e.

- (UK) May PPI Input M/M: 2.1% v 1.8%e; Y/Y: 22.1% v 19.4%e.

- (UK) May PPI Output M/M: 1.6% v 1.5%e; Y/Y: 15.7% v 14.7%e.

- (SE) Sweden May Unemployment Rate: 8.5% v 8.2% prior; Unemployment Rate (seasonally adj): 7.8% v 7.6%e; Trend Unemployment Rate: 7.7% v 7.7% prior.

- (DK) Denmark Jun Consumer Confidence: # v -22.4 prior.

- (JP) Japan May Final Machine Tool Orders Y/Y: 23.7% v 23.7% prelim.

- (HU) Hungary Q1 Current Account: -€2.4B v -€2.5Be.

- (TR) Turkey Jun Consumer Confidence: 63.4 v 67.6 prior.

- (MY) Malaysia mid-Jun Foreign Reserves: $109.2B v $112.8B prior.

- (ZA) South Africa May CPI M/M: 0.7% v 0.3%e; Y/Y: 6.5% v 6.1%e (moved above target range for 1st time in 15 months).

- (ZA) South Africa May CPI Core M/M: 0.2% v 0.2%e; Y/Y: 4.1% v 4.1%e.

- (PL) Poland May Real Retail Sales M/M:-1.7 % v -1.9%e; Y/Y: 8,2% v 8.8%e; Retail Sales Y/Y: 23.6% v 23.3%e.

- (PL) Poland May Construction Output Y/Y: 13.0% v 8.3%e.

- (UK) Apr ONS House Price Index Y/Y: % v 9.8% prior.

- (IS) Iceland Central Bank (Sedibank) raised 7-Day Term Deposit Rate by 100bps to 4.75%.

- (BE) Belgium Jun Consumer Confidence: -11 v -13 prior.

Fixed income issuance

- (IN) India sold total INR330B vs. INR330B indicated in 3-month, 6-month and 12-month bills.

- (SE) Sweden sold SEK12.5B vs. SEK12.5B indicated in 3-month Bills; Avg Yield: 0.5224% v 0.3167% prior; Bid-to-cover: 1.38x v 2.07x prior.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (DE) Germany to sell €1.5B in 1.0% May 2038 Bunds.

- 05:30 (HU) Hungary Debt Agency (AKK) switch auction.

- 05:30 (ZA) South Africa announces details of next bond auction (held on Tuesdays).

- 06:00 (IE) Ireland May PPI M/M: No est v 1.2% prior; Y/Y: No est v 5.2% prior.

- 06:45 (US) Daily Libor Fixing.

- 07:00 (US) MBA Mortgage Applications w/e Jun 17th: No est v 6.6% prior.

- 07:00 (UK) Weekly PM Question time in House.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:30 (CA) Canada May CPI M/M: 1.0%e v 0.6% prior; Y/Y: 7.3%e v 6.8% prior; Consumer Price Index: 151.1e v 149.8 prior; CPI Core- Common Y/Y: 3.4%e v 3.2% prior; CPI Core- Median Y/Y: 4.7%e v 4.4% prior; CPI Core- Trim Y/Y: 5.4%e v 5.1% prior.

- 08:30 (Czech Central Bank (CNB) interest Rate Decision: Expected to raise 2-Week Repurchase Rate by 100bps to 6.75%.

- 08:55 (US) Weekly Redbook LFL Sales data.

- 09:30 (US) Fed Chair Powell semi-annual testimony in Senate.

- 10:00 (EU) Euro Zone Jun Advance Consumer Confidence: -20.5e v -21.1 prior.

- 10:40 (CA) Bank of Canada (BOC) Rogers.

- 11:30 (US) Treasury to sell 2-Year FRN Reopening.

- 12:00 (RU) Russia May PPI M/M: No est v 6.3% prior; Y/Y: 34.9%e v 31.5% prior.

- 12:00 (CA) Canada to sell 3 Year Bonds.

- 12:50 (US) Fed’s Evans on economic outlook.

- 13:00 (US) Treasury to sell 20-Year Bonds Reopening.

- 13:30 (US) Fed’s Harker.

- 15:00 (AR) Argentina Apr Shop Center Sales Y/Y: No est v 24.6% prior; Supermarket Sales Y/Y: No est v -0.1% prior.

- 15:00 (AR) Argentina May Trade Balance: $1.5Be v $1.4B prior.

- 16:30 (US) Weekly API Oil Inventories.

- 17:00 (KR) South Korea May PPI M/M: No est v 1.1% prior; Y/Y: No est v 9.2% prior.

- 19:00 (AU) Australia Jun Preliminary PMI Manufacturing: No est v 55.7 prior; PMI Services: No est v 53.2 prior; PMI Composite: No est v 52.9 prior.

- 20:30 (JP) Japan Jun Preliminary PMI Manufacturing: No est v 53.3 prior; PMI Services: No est v 52.6 prior; PMI Composite: No est v 52.3 prior.

- 21:00 (CN) China May Swift Global Payments (CNY): No est v 2.14% prior.

- 23:35 (JP) Japan to sell 20-Year JGB Bonds.