Marketmind: We are not there yet

A look at the day ahead in markets from Sujata Rao.

If market concerns have moved on from inflation to economic recession, there is no sign central banks are listening.

Bank of England governor Andrew Bailey made it clear where his priorities lie, pledging to bring inflation back to target “no ifs or buts”, even with an economy that’s almost certainly headed for contraction.

That means a 50 basis-point rate hike is now in play for the BoE’s August 4 meeting.

Nor are other central banks sitting on their hands. After New Zealand’s sixth straight interest rate rise, we may see a 75 bps move in Canada later on Wednesday. South Korea delivered an unprecedented half-point rate rise, and Chile is expected to lift rates to 9.5% later in the day.

As for the United States, where interest rates are seen doubling by year-end, the International Monetary Fund cut its 2022 growth forecasts to 2.3%, 0.6 percentage points below what it predicted just a month ago.

What’s more the Treasury 2-year/10-year yield curve is displaying the largest inversion in over a decade, a classic recession signal.

So all eyes are now on the June U.S. inflation print which is expected to come in at 8.8%. But if “core” CPI – inflation minus food and energy prices – indeed cools as expected to 5.7%, it may allow markets to dial back some Fed policy tightening bets.

It may also offer respite to the euro, still teetering on the brink of parity with the dollar (some platforms, including Reuters dealing, show the single currency did briefly slide below $1). To all intents and purposes however, the euro is at parity. Whether it slides even lower hinges on how energy supplies shape up.

European stocks are opening weaker, though Wall Street futures are still firmer on the day.

Key developments that should provide more direction to markets on Wednesday:

-Japan business mood subdued on chip shortage, raw material costs

-China June exports rise 17.9% y/y, imports grow 1%

-Britain’s economy grew by a monthly 0.5% in May,

-Euro zone industrial output

-U.S. 30-year bond auction

-U.S. earnings: Delta Airlines

(Reporting by Sujata Rao; editing by Karin Strohecker)

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