Markets have tumbled once more after the brief respite in risk assets and equities last month. Investors’ mentality has changed to “sell the rally”, in sharp contrast to the “buy the dip” mantra from the era of abundant liquidity. Stock markets have been rattled by rate rises and have already fallen a long way this year. Yet it may be too early to pick a bottom, with tightness in labour markets especially, set to take time to unwind.  

Central bankers have been showcasing their inflation fighting credentials this month, with the ECB’s forum at Sintra this week to the fore. The current economy should be able to stomach further interest rate rises as the Fed Chair Powell stated. Of course, there is a danger of tipping over the economy, but the greater risk would be falling behind in the fight against red-hot, sticky inflation. Money markets have reacted by bringing forward the prospective economic turning points for a recession. The US sees peak rates early in 2023 before rate cuts across the rest of the year.

The dollar is closing in on its highs for 2022 as recessionary fears fail to diminish the major narrative that inflation is a problem. June saw the ratcheting up in interest rate increases. How much higher the greenback can go will likely depend on how sticky price pressures are through the summer. We also note the retracement in the 10-year US Treasury yield from the multi-year high just below 3.50% posted earlier this month. This means it is a hugely significant resistance level going forward.

Major events of the month, in numbers

*8.6% US CPI: It was hoped that the year-on-year inflation print in June would begin to fall as we saw “peak” price pressures. But instead, annual CPI surged with its biggest gains since 1981, following an 8.3% jump in May. The 1% m/m gain was also a huge beat, after gaining 0.3% in April. This data extinguished any chance that there would be a pause in rate hikes over the summer. Indeed, it presaged this month’s bigger-than-expected 75bps rate hike. US stocks posted their biggest weekly percentage declines since January after the CPI data.

*75bps US Rate Hike: The Fed delivered its biggest interest rate rise since 1994 at the June meeting. Fed Chair Powell had said at the previous FOMC meeting that they were not even considering such a hike. But markets had actually priced the size of this move in due to the media being briefed after the outsized CPI data. This pace of tightening is fully expected in July as well. The updated median “dot plot” for year-end was 3.8%, though the terminal rate has moved lower in the latter part of the month. This key driver for the dollar may mean more upside is limited.

*-14.87% S&P500: Peak to trough, June has been a brutal month for the blue-chip equity index. Over the quarter, the benchmark has lost almost 16% while US stocks have endured their worst performance for the first six months of a year since 1970. The days of being able to rely on central banks easy monetary policy to support economic growth are a matter for the history books. That said, big drops to start a year have historically tended to see big bounces. Is this year different?

* +8% CSI 300: In contrast to other major equity markets, the broad-based Chinese benchmark has enjoyed its biggest one-month rise since July 2020. The recent first major relaxation in travel restrictions this week has buoyed buyers. Chinese policymakers have also been stepping up their efforts to bolster economic growth while a less severe approach to policing tech companies has seen a rebound in the battered tech sector.

* -20.47% Copper: The more hawkish approach from the Fed and other central bankers around the globe has weighed heavily on the metals complex. “Dr Copper” is a well-known economic growth bellwether and has a record as a boom-bust indicator.  The metal is down over 20% from the high to low this month. It has fallen over 25% from its high in March above $5. There have also been Chilean supply issues to deal with, though the market is more focused on macro concerns.