Markets factoring both economic downturn and rate hike

Markets are of view that economic recession is here but rate hikes will also prevail, hence they are falling. Be it equity markets, commodity markets or even currency.

Starting with US, Jobless claims are increasing and banks in US have taken more emergency borrowing from Fed for 1st time in 5 weeks.

In Asia, Inflation in Japan has stayed constant at 3.2%, PMI data from Japan disappointed as it was below expectations and manufacturing continued in contraction zone.

UK consumer confidence up

In UK consumer confidence is improving and retail sales also fell less than expected. after being stagnant since few months. Retail sales fell more than expected on monthly basis but on yearly basis they show signs of improvement.

Manufacturing PMI across Europe is in contraction but services in expansion. French manufacturing PMI came at 45.5 from 47.3 last month. Similarly German and European manufacturig PMI came at 44.0 and 45.5 respectively. Both are below expectations. Since quite some time, manufacturig PMI is in contraction zone i.e belo 50.

Services are pointing to better picture. Services PMI for whole Europe came at 56.6 while last month it was 55.0

Lets parse all this.

Manufacturing PMI may be in contraction due to high inventories. Coming to service sector, it accounts to 65% in Europe and 77% in US. Expanding service sector and in tight labour market creates tailwind for wage inflation. Hence central banks may continue to hike rates to anchor inflation expectations.

While higher emergency loan for banks in US indicate tightness. So all this led to fall in markets. However Fed officials and Christina Lagarde indicted hawkish stance will stay.

Way ahead
Coming ahead, market will look at PMI data from US and speeches of central bank officials to gauge the direction of central bank. Earning results will also be parsed for future guidance and outlook.

On geopolitical front, US president Joe Biden will look to convince G7 members to reduce investment in China. This would be done in order to prevent China from getting access to latest technology and also to hamper its growth.

On domestic front Indian markets are following global cues and earnings data. Earnings data of IT majors were not impressive and now focus is on other blue chips firms like ICICI bank and RIL.