Marketmind: Precarious landing zone

By Thomson Reuters Aug 16, 2022 | 5:21 AM

(Reuters) – A look at the day ahead in U.S. and global markets from Mike Dolan.

Markets may be leaning toward a ‘soft landing’ for the U.S. economy, but treacherous winds still surround the runway.

Wall St stocks have climbed for two solid months, prompting an almost 25% bounce in the S&P500 since mid-June. Hopes centre on commodity-driven inflation rates peaking, allowing the Federal Reserve to ease off the monetary brakes and guide a gentler economic slowdown that avoids a deep recession.

Although Monday’s economic soundings from China, U.S. housing and New York manufacturing showed that a slowdown is well underway around the world, it also stokes narratives of ‘peak inflation’ and a less aggressive Fed. China’s surprise rate cut on Monday underlined that.

Oil prices continued to ease on Tuesday and Brent crude is again eyeing its lowest levels since before the invasion of Ukraine in February, with global demand worries mixing with speculation about an Iran nuclear deal and U.S. shale oil output rising to pre-COVID levels. Barclays moved to cut its average Brent price view for this year and next.

The problem for the Fed and investors is that markets run ahead of themselves by reversing the tightening of overall financial conditions the Fed deems necessary to get inflation back to target.

A whopping 150-basis-point drop in U.S. junk bond spreads in little over a month speaks loudly to that, as does the more than half-point drop in 30-year mortgage rates since mid-year.

Jason Draho at UBS Global Wealth Management reckons a “disconnect” between buoyant stocks and the deeply inverted U.S. yield curve “implies one of them isn’t right” – but it could be several weeks before that becomes any clearer.

U.S. July industrial production and housing starts top the data slate later on Tuesday, while earnings from Walmart and Home Depot give a snapshot of what it’s like in the shops.

On the dashboard, S&P500 futures and Treasury yields are mostly flat and the dollar stronger.

High commodity prices saw bumper earnings and a record dividend from miner BHP Group, lifting its shares 4% and boosting the sector more broadly.

And in one circular flow from high oil prices, filings showed Saudi Arabia’s Public Investment Fund (PIF) used swooning market prices to load up on U.S. stocks such as Alphabet, Zoom and Microsoft and whole host of mega caps.


Surprises https://fingfx.thomsonreuters.com/gfx/mkt/znpnernnzvl/Two.PNG

Junk Bonds https://fingfx.thomsonreuters.com/gfx/mkt/zdvxozkkdpx/One.PNG

U.S. financial conditions loosen https://fingfx.thomsonreuters.com/gfx/mkt/movangyzqpa/1BS0o-u-s-financial-conditions-loosen-significantly-after-june-hike.png

Key developments that may provide market direction on Tuesday:

* UK job creation disappoints as nominal wage growth picks up

* Earnings releases from Walmart and Home Depot

* US July Housing Starts/Permits

* US July industrial production

* Canada July CPI inflation

(Mike Dolan mike.dolan@thomsonreuters.com Twitter: @ReutersMikeD; Editing by Emelia Sithole-Matarise)