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North American Morning Briefing: Futures Rise but Recession Fears Still in Focus

MARKET WRAPS

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EIA Weekly Petroleum Status Report; Final 1Q Economic Growth Figures

Opening Call:

Stock futures rose on Tuesday after the momentum from last week's rally stalled on Monday.

Concerns on Wall Street continue to center on how aggressive the Federal Reserve will be in raising interest rates with the risk of recession looming large.

The week ahead holds notable economic data and meetings, while action also could be driven by the close of the trading month and second quarter on Thursday.

"It is the month and quarter-end this week, and that will prompt no small amount of portfolio rebalancing by institutional investors globally," said OANDA's Jeffrey Halley. "We should expect the back-and-forth chop-fest to continue this week in the equity space."

Later Tuesday, investors will parse data on home prices, as well as consumer confidence data from The Conference Board. Economists surveyed by The Wall Street Journal expect consumers' optimism to further cool for June as Americans continue to assess the impact of high inflation and rising interest rates.

In premarket trading in New York, travel and energy companies were bright spots in the market. Occidental Petroleum and Devon Energy each climbed more than 2%. Wynn Resorts climbed 4.9% and cruise line Carnival rose 1.6%.

Overseas, the pan-European Stoxx 600 was up 0.4% while Asian stocks closed broadly higher.

Chinese shares gained after authorities said they will ease quarantine requirements for international travelers entering the country, as part of efforts to balance their zero-Covid policy and rising economic pressures.

Shares in airlines, restaurant chains and Macau casino operators surged.

Read: China to Loosen Quarantine Requirements for International Travelers

Economic Insight:

The economy is expected to grow 2.4% this year but higher prices and interest rates will likely push it into a recession in 2023, said S&P.

Economic momentum due to resilient consumers will likely protect the economy this year, but persistently high prices and aggressive interest rate increases will weigh on growth next year.

"With the Russia-Ukraine conflict and China slowdown exacerbating supply chains and pricing pressures, it's hard to see the economy walking out of 2023 unscathed."

S&P has forecast GDP growth to slow to 1.6% in 2023 and the unemployment rate to climb to 4.3% by the end of next year.

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Consumer confidence likely declined again in June as Americans' views of both the current situation and the outlook will have worsened due to the drop in stock prices and the surge in gasoline prices, said Pantheon Macroeconomics.

However, the index from the Conference Board will likely remain just slightly below its long-term average as a strong labor market is partly offsetting concerns about inflation.

"With unemployment [rate] at only 3.6% and payrolls heading rapidly toward the pre-Covid peaks, it is hard for people to argue that the labor market is in poor shape."

Forex:

The dollar could weaken further because of dimming prospects of interest-rate increases by the Fed, said ActivTrades.

"With commodity prices falling and recession fears growing, some now believe that the Fed will not be able to go as far as previously expected, in terms of tightening, in a dynamic that is shifting expectations towards a slightly lower benchmark U.S. rate than had previously been expected, creating scope for further dollar weakness."

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Sterling continued to show little reaction to Brexit headlines even after the U.K. government's Northern Ireland bill cleared its first hurdle, said ING.

The bill, which unilaterally rips up post-Brexit trading arrangements for Northern Ireland, passed the second reading stage in the House of Commons on Monday.

"There are surely many indications that the pound is largely pricing in this scenario, and markets remain mostly focused on other drivers of U.K. economic underperformance as well as assuming Brexit is not a major input in the Bank of England's policy decision-making process at the moment," said ING.

Bonds:

Recession fears have brought much needed two-way risk in rates price action, said ING.

"This isn't to say that the past few months were a smooth transition towards a world of higher interest rates, but it feels like last week's rally has really woken up investors to the rates downside scenario."

Growing recession fears have undoubtedly contributed to calm long-term inflation swaps, the strategists say. "We are tempted to say that the upside in long-term yields is more limited than a few months ago, and that a bond market selloff would likely be felt more acutely in the front-end," ING said, referring to short-dated bonds.

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High-yield corporate bonds bore the brunt of spread widening with credit in the second quarter, with only a brief respite during a short-lived relief rally at the end of May, said HSBC.

U.S. dollar-denominated high-yield had the worst performance and saw the most aggressive spread widening. USD investment-grade credit, which saw the least spread widening, outperformed euro-demonominated investment-grade credit, HSBC said.

Energy:

Oil prices rose around 1% in Europe on concerns over a lack of extra supplies from the world's leading producers.

The United Arab Emirates' Energy Minister said on Monday that the major oil producer was near to producing at its maximum capacity. The U.A.E. along with Saudi Arabia has been seen as one of the few major OPEC members capable of making up for lost Russian supply to help balance the market.

"A seam of tight supply news has bolstered the market," said CBA.

Metals:

Base metals and gold pushed higher in early European action, boosted by improving demand sentiment on signals that parts of China will be loosening lockdown restrictions in the near term.

Beijing and Shanghai have slowly been lifting some Covid-19 lockdown restrictions this week, which should help boost buying for metals. Data from Bloomberg on Monday showed that economic activity in Shanghai had risen after it had lifted some restrictions.

Investors will be keeping a close eye on Thursday's release of PMI results for the region, looking for further signs of improvement.

   
 
 
   
 
 

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June 28, 2022 05:26 ET (09:26 GMT)

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