Worst start in 50 years
The S&P 500 fell 2% this week after a 7% rally last week. The US stock market is on track for its worst first half in more than 50 years, since the 1970s. Even investors in diversified balanced portfolios (with equity and bonds) have experienced drawdowns. Assets that were initially thought of as unaffected by the larger macroeconomic trends did not prove to be a safe refuge, with Bitcoin, the largest cryptocurrency, down more than 50%.
Concerns shifting from inflation to growth
As we mentioned last week, the latest consumer inflation expectations came in lower than expected. A more reliable indicator of inflation expectations that the Fed watches closely is the 5 year/5 year breakevens, which captures average inflation for five years in five years’ time. This indicator has now fallen below pre-pandemic levels and closer to the Fed’s long term target inflation of 2%.
Fed is still on a warpath against inflation
At a meeting with other central bankers in Portugal this week, Chair Powell said that slowing growth down for supply to catch up remains a “necessary adjustment that needs to happen”.
We are already seeing signs that the economy is slowing down. IHS Markit, provider of financial market information, estimated Q2 2022 US GDP to grow at 0.1%, a downward revision from 2.4%. Other forecasters now say that it is possible for economic growth to even turn negative for a second consecutive quarter, marking a commonly held but unofficial definition of a recession.
The National Bureau of Economic Research, which decides when expansions and contractions start and end, defines recessions differently, as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Currently, most economists and policymakers going by that definition, would concur that the United States is not in a recession yet. However, more believe that a recession is likely in the next year, as the Fed taps on the brakes a bit too hard to slow down the economy and rein in inflation.
China government’s gift for HK
ETF connect starts on Jul 4, 2022; expansion of ETF products after the stock connect is the first stop, the swap connect of Bond products will come next. Under the ETF connect, northbound investors can now trade for 83 ETFs, including the board market index ETFs and thematics ETFs. Some thematics are hottest including renewable energy, NEV and semiconductors.
President Xi arrived in HK to celebrate the 25th HK anniversary of return and inaugurated the new government handover. His speech remarked on the reassurance of Hong Kong’s unique status . The mission for the new Hong Kong government is prosperity and stability; and to continue on ‘one country, two systems’. HSI index ended the week +0.65%. The Hong Kong investors are looking forward to a more relaxed travel bubble within the Great Bay Area.
MSCI China, fell 1 % over the week. In contrast, A shares have enjoyed a decent run. Besides the Tech sweethearts, leisure sectors outperformed as China halved its mandatory two week hotel quarantine.
In fact, Chinese stocks are approaching a bull market. The CSI 300 had locked in five weeks of gains and risen almost 20% since its lows in April. The Shanghai Composite Index has been running a straight 6 week rally. In contrast to other major economies grappling with inflation, China’s inflation rate is currently 2% and leaves PBoC with a lot of room for policy stimulus in order to achieve its GDP growth target of 5.5%.
The Chinese government is cautious on the live pork price which rose ~40% from April to CNY 16.7/kg last week. NDRC has called for the industry meeting to check the prices are not rigged and to boost breeding. Within the food basket, pork is the most important item with a weight of about 13%, equal to about 2.5% of the total CPI.
Market Stats
