Investors have long been gearing up for a recession, and this week saw United States (US) Federal Reserve (Fed) Chairman, Jerome Powell, acknowledge that aggressive rate hikes may result in an economic downturn, however Powell also stated that a recession would be preferable to a prolonged period of high inflation.
A recession is defined as a substantial decline of economic growth and is typically recognised as two consecutive quarters of a decline in gross domestic product (GDP), which reflects economic growth. The National Bureau of Economic Research (NBER) expands upon this, defining a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” A recession becomes a depression when this situation endures for a number of years.
It is important to bear in mind that each recession is different. For example, the NBER officially declared the end of economic expansion in February of 2020 as the US fell into a recession brought on by the Coronavirus pandemic. According to the NBER, this recession was the shortest on record, ending only two months later in April 2020. In stark contrast, the financial crisis of 2007 and 2008 was one of the deepest recessions on record. According to the NBER the US has been the victim of 34 recessions since 1854, and five since 1980.
So, what causes a recession? Historically, recessions are almost always preceded by a period of tightening monetary policy (rising interest rates, for example) and fiscal contraction (less government spending, higher taxes, or both), and often higher energy prices.
If we enter a recession, what can we expect? Depending on the duration and depth of the recession, there can be numerous effects. Some key consequences of a recession include:
- Business revenue and profits tend to decline
- Manufacturing output declines
- Unemployment rises
- Businesses and households lose their creditworthiness resulting in mass credit impairment
Investor and analyst predictions indicate a 50% to 60% risk of recession, Fed Vice Chair, Alan Blinder, also supports these probabilities.
DATA IN A NUTSHELL
The official China NBS Manufacturing PMI rose to 50.2 in June, recovering from 49.6 the previous month. This reading marks the first expansion in factory activity since February and represents the
fastest pace in six months, as major economic hubs, including the financial capital, Shanghai, lifted COVID-19 restrictions and lockdown measures. Output, new orders and buying levels rebounded, all growing for the first time in four months.
United Kingdom (UK) GDP grew by 8.70% year-on-year in the first quarter of 2022, while business investment fell 0.6% quarter-on-quarter for the same period, compared to a preliminary estimate of a 0.5% decrease. It marks the first quarterly decline since the Q1 2021.
The unemployment rate in the eurozone fell to a fresh record low of 6.6% in May, from 6.7% in April, and compared to market forecasts of 6.8%. The unemployment rate for women decreased to 7.1% from 7.2% and for men it fell to 6.2% from 6.3%.
The number of Americans filing new claims for unemployment benefits dropped by 2,000 to 231,000 in the week ending 25 June. On a non-seasonally adjusted basis, initial claims rose by 1,060 from the previous week to 207,421, with noteworthy increases seen in New Jersey, Massachusetts, Ohio and Kentucky.
S&P500 ON VERGE OF WORST HALF YEAR SINCE 1970
All three major US stock indices opened Thursday’s session in deeply negative territory, with the S&P 500 heading for its worst first half year since 1970 amid continuous concerns over the implications of soaring inflation and tighter monetary policy. All three major averages were on track to post steep monthly, as well as quarterly losses, with technology stocks hit hardest.
European stocks descended on the last trading day of June and were set for their worst quarter since early 2020. The DAX slumped nearly 3%, to levels not seen in four months, pushing second quarter losses to over 11%, while the STOXX 600 dropped almost 2%, also down more than 11% on the quarter, as fears of a recession intensify due to the war in Ukraine. The auto sector was among the worst performers, shedding close to 5%, reaching levels last seen in November 2020. Meanwhile, shares of German energy company, Uniper, nosedived nearly 16%, after the company withdrew its financial outlook for 2022 on Gazprom gas supply restrictions.
Stocks in London were also in the red, shedding value for second consecutive session on Thursday, with the blue-chip FTSE 100 bottoming out below the 7,200 level, dragged down by heavyweight materials stocks. B&M European Value Retail and Burberry Group were among the biggest stragglers on the index, down 4.5% and 3.7%, respectively. The benchmark FTSE 100 lost nearly 6% in June, putting it on track to post its first monthly decline in four months.
OIL CAUGHT BETWEEN DECLINING DEMAND AND TIGHT SUPPLY
Brent Crude futures fell almost 1%, to trade back below $116 a barrel on Thursday, following a volatile week, ending the month of June with a marginal monthly decline. Investors continue to weigh fears of an economic slowdown and signs of weakening US fuel demand, with near-record prices, which are likely suppressing consumption. On the other hand, tight supply continues to pressure the oil market, amid the ongoing war in Ukraine and outages from Libya and Ecuador. Meanwhile, the extended Organisation of Petroleum Export Countries, OPEC+, remains bound to previously approved oil output increases in July and August and refrained from any policy discussions for September.
Platinum futures rose to a one-week high, to trade near $920 per tonne, rebounding slightly from its 20-month low of $907, hit earlier in the week, as hopes of solid demand and fears of tight supplies more than sufficiently offset the global growth concerns. Demand is expected to rise as the Chinese economic hubs reignite international travel and start to resume leisure activities after a two-month lockdown. Global platinum supply is expected to remain tight as the war in Ukraine shows no signs of abating. Platinum shipments from Russia, the world’s top supplier, have been disrupted due to the war. Meanwhile, traders assessed the latest gold import ban from Russia by the G7 leaders, waiting to see if the decision spills in the platinum market too.
Gold remained subdued at $1,820 per fine ounce on Thursday and was set to decline for the third consecutive month, facing pressure throughout the quarter from a strong dollar and rising Treasury yields, as the Fed leads its central bank peers in aggressive monetary tightening to combat rocketing inflation.
DOLLAR RALLIES YET AGAIN
The dollar index traded above the 105 mark on Thursday, hovering close to the 20-year high of 105.79 touched in mid-June, as global recession fears bolstered demand for safe-haven assets such as the dollar, while the Fed’s hawkishness also supported the currency. In addition, Cleveland Fed President, Loretta Mester, said that she will be advocating for another 75 basis point rate increase in July, should economic conditions remain the same.
The euro weakened further to trade near the $1.04 mark, edging closer to the five-year low of $1.035 hit in May, on the back of a stronger greenback. Investors’ preference toward the safer dollar grew as concerns of an energy crisis in Europe threaten the eurozone’s economy ahead of the winter. Confidence in the currency bloc also came under pressure after European Central Bank (ECB) President, Christine Lagarde, said that she believes it is unlikely that the eurozone will go back to an environment with low inflation. The ECB had confirmed a 25 basis point rate hike in July after multiple ECB policymakers called for a steeper increase.
The British pound is set to end the quarter below $1.22 and lost more than 10% in the first half of the year, the worst six-month performance since 2016, the year of the Brexit referendum. General dollar strength, mounting recession fears, soaring inflation rates, and a fall in UK’s living standards have been weighing on the currency.
The pound started the day trading at 1.2176/$ and 1.1619/€.
Written by Citadel Global Director, Bianca Botes
© Peregrine Wealth Ltd
This publication has been compiled for information purposes only and does not take into account the needs or circumstances of any person or constitute advice of any kind. It is not an offer to sell or an invitation to invest. The information and opinions in this publication have been recorded by Peregrine Wealth Ltd in good faith from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness or correctness. Peregrine Wealth Ltd accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this publication or its contents. Peregrine Wealth Ltd (registration number 39538) is licensed by the Guernsey Financial Services Commission.