Daily Insight - London Open Edition

What’s driving markets today into the London open?

?·??????Fed speakers comments jawbone stocks lower across the globe

·??????USD regains its footing as risk assets sold off due to recession red flags

·??????Recession risks flagged by Fed Harker who also doesn’t expect it to be deep

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Why it matters?

The risks of a mild recession in the U.S. have been confirmed by Fed speakers over the past 24 hours. Reiterating Chair Powell’s comments, other U.S. Federal Reserve officials have stated that in the coming quarters we could see the potential for negative growth. That said, the expectations for now are that this largely will be a shallow one, since the labour market continues to be strong and job openings remain ample.

What we’re hearing?

None other but Elon Musk highlighted at a venture capital conference that we have entered into a recession (something that he predicted in the autumn of last year). The ongoing tightening cycle is pressuring stocks, and the word on the street is that the Fed might be done with hiking rates already. The reason for this hypothesis by many market analysts is the pace of the selloff of risk assets will dissuade the central bank from hiking further.

What we’re watching?

A stellar employment report out of Australia provided only a temporary relief to the Australian dollar, as the risk assets selloff accelerated into the European open. Top-tier data points to watch in Europe are the UK’s CBI orders at 11:00 GMT, expected to decline 2 points to 12, and the ECB’s monetary policy meeting minutes at 12:30 GMT. ECB’s De Guindos will speak at 13:30 GMT and could reiterate the hawkish tone seen recently that provided the temporary boost for the euro in recent sessions.

The U.S. starts with jobless claims and the Philly Fed survey at 13:30 GMT, followed by Existing Home sales at 15:00 GMT. Fed speakers are limited to one today, with Kashkari scheduled to speak at 21:00 GMT.

Oil prices have gotten hammered yesterday even despite a larger than expected draw in crude supplies in the U.S. With the strategic petroleum reserve at its lowest levels since 1987, the situation in the market could only be a temporary relief. Russian oil minister Novak outlined that the country is preparing to increase oil production in May after it has declined over 7% already. It remains to be seen whether Russia can actually do it, since the Western mining equipment manufacturers have started to pull out of the country already.

What they’re saying?

Fed’s Harker: The labour market will soften somewhat, but the goal is not to let it become recessionary. I am not forecasting a deep recession.

Between the lines

Just a day after the market interpreted Powell’s comments as a soft landing, the elaboration on the matter on part of other Fed officials shifted the outlook 180 degrees with a recession now basically being the consensus view. Despite the Fed’s effort to signal that it’s likely to be a shallow one and the labour market continues to be strong, the fear sentiment has taken over the equities space and is driving risk assets lower.

Flashback

Historically the Fed has always stated that their engineering a soft landing of the economy, but inflationary pressures this time could actually impact their effort more than expected.