Take Five: Surging inflation, recession risk and tanking markets

Central banks are wrestling with inflation and sliding stocks are feeling the heat, leaving investors to ponder just where the so-called “Fed put” has gone.

Here’s your look at the week ahead from Ira Iosebashvili in New York, Kevin Buckland in Tokyo and Dhara Ranasinghe, Saikat Chatterjee and Karin Strohecker in London.

Fed thinking

Can the Federal Reserve tame the worst US inflation in decades without dragging the economy into a recession? The bank’s meeting minutes on May 25 will offer clues.

Chair Jerome Powell is confident the Fed can achieve a “soft landing” -- words that are little solace to equity markets as recession warnings from big Wall Street banks pile up. Having raised rates by 75 basis points since March, the Fed is expected to hike another 50 bps in July.

A bear hug

Wall Street is melting. Major stock market indexes are in the grip of bear market territory with S&P 500 down some 19 per cent, the high flying Nasdaq has lost more than a quarter from a November 2021 peak. And there’s no respite in sight: Barclays and Goldman predict further pain for equities as corporate margins suffer from surging inflation.

The selloff is widespread. Since the bond bull market peak in March 2020, a constant duration 30-year US Treasury bond lost half its value, safe-haven gold is down 6 per cent this quarter. Surging volatility means even hardened stock pickers are reluctant to take big bets.

Pivot point

Forward-looking Purchasing Managers’ Index (PMI) data from the United States, Australia, Britain, Japan and euro area is worth paying attention to. And more so than usual with central banks caught between surging inflation and its impact on consumers amid a darkening growth outlook, hurt by China’s COVID-lockdowns and war in Ukraine. China bounced back quickly from an initial 2020 pandemic slump thanks to bumper exports and factory production, but the current downturn could be harder to shake off.

Early movers catching up

They were early movers, but the race is on for central banks in New Zealand and Korea to stay ahead of a Fed hot on their heels with some big-step hikes.

The Reserve Bank of New Zealand is widely seen raising rates by a half point again on Wednesday to tame inflation though risks to the economy are rising with recent homebuyers feeling the pain of higher mortgage rates.

Russia faces default, again

The prospect of a Russian sovereign default is back, given a deadline for a US license allowing Moscow to make payments expires on May 25.

To dodge that deadline, Russia said late on Friday it had sent interest payments amounting to $100 million on two dollar bonds. The coupons were due two days after the deadline.