Slowing growth and surging inflation may not spark a 70s-style bout of global stagflation, but dimming prospects for the U.S. economy have stocks trading cautiously Wednesday.
U.S. equity futures slipped lower Wednesday, while oil prices and the dollar continued to climb, as investors continued to navigate the impact of surging inflation and central bank tightening on global economic growth.
The OECD, in fact, slashed both its U.S. and global growth forecasts on Wednesday, while doubling its inflation estimate, but noted that it doesn’t yet see the risk of stagflation that some analysts suggest could characterize the world economy over the second half of the year.
“The world is paying a heavy price for Russia’s war in Ukraine. It is a humanitarian disaster, killing thousands and forcing millions from their homes,” the OECD said. “The war has also triggered a cost-of-living crisis, affecting people worldwide. When coupled with China’s zero-COVID policy, the war has set the global economy on a course of slower growth and rising inflation – a situation not seen since the 1970s.
Headline inflationary pressures remain powerful, particularly in the United States, where WTI crude is trading at $120.58 per barrel ahead of the Energy Department’s weekly update on domestic inventories, while gas prices rose to a fresh all-time high of $4.955 per gallon, according to the most recent AAA assessment.
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Target’s (TGT) – Get Target Corporation Report warning on profit margins yesterday, as well as its plans to run-down its excess inventory through deeper price discounts, may offer consumers some near-term relief, but overall prices are likely to remain close to their forty-year peaks until at least the autumn, putting even more pressure on the Federal Reserve to maintain its projected pace of interest rate hikes.
The CME Group’s FedWatch tool is pricing in a 98% chance of a 50 basis point rate hike next week, while also placing a 13.7% probability on a 75 basis point move when the Fed meets next in July.
Stocks were mostly weaker in Europe Wednesday, with a profit warning from Credit Suisse holding down gains for the banking sector and dragging the region-wide Stoxx index to a 0.65% decline by mid-day trading in Frankfurt.
Citing both the impact of Russia’s war on Ukraine, as well as the rapid pace of central bank tightening amid the surge in global inflation, Credit Suisse said it’s likely to book another quarterly loss over the three months ending in June.
“The impact of these conditions, together with continued low levels of capital markets issuance and the widening in credit spreads, have depressed the financial performance of this division in April and May,” the bank said.
Overnight in Asia, the region-wide MSCI ex-Japan index gained 1.05% in a follow-on rally from Wall Street’s solid close, while a weaker yen, which is trading at the lowest levels against the U.S. dollar in more than twenty years, helped the export-focused Nikkei 225 in Japan close at a two-and-a-half month high of 28,234.29 points.
In the U.S., benchmark 10-year Treasury bond yields held at 3.011% in overnight trading while and the dollar index rose 0.42% against a basket of six global currencies to 102.749 in early European trading.
On Wall Street, futures tied to the Dow Jones Industrial Average indicating a 105 point opening bell retreat while those linked the S&P 500, are priced for an 10 point move to the downside. Futures linked to the tech-focused Nasdaq are looking at modest 5 point opening bell gain.
Intel (INTC) – Get Intel Corporation Report shares were an active name in pre-market trading, falling 2.5% after analysts at Citigroup cautioned that the chipmaker could pre-announce weaker-than-expected second quarter earnings and lowered their near-term profit estimates.
Novavax (NVAX) – Get Novavax Inc. Report shares soared 18% after an advisory panel to the U.S. Food and Drug Administration recommended granting Emergency Use Authorization for the group’s Covid vaccine to patients over the age of eighteen.
Western Digital Corp. (WDC) – Get Western Digital Corporation Report shares were also on the move, rising 4.2% after the chipmaker said it would launch a review of its strategic options following a renewed push by activist investors for the sale of its flash memory business.