Risk assets ended last week on a positive note, with stocks rebounding strongly on Friday after their steep falls earlier in the week. News that Shanghai planned to start lifting restrictions this week was received positively by the market, although the rebound is likely as much tied to a correction in oversold levels as it is to a change in investors’ economic outlook. Global rates and commodity currencies also rallied, with the NZD ending the week around 0.6785. Friday saw steep declines in wholesale rates in New Zealand, with the market reducing expectations for RBNZ OCR hikes over the next year.

The past few months have been tumultuous for equity markets as the market has begun to price in the risk of a global recession. On Friday, the mood improved somewhat, with strong gains in both the S&P500 (+2.4%) and the NASDAQ (+3.8%). The S&P500 had rounded a bear market on Thursday, defined as 20% from the top, although Friday’s rally saw it avoid that fate, for now.

Similarly, the US 10-year rate recovered 7 basis points on Friday, to 2.92%, while European 10-year rates rebounded from their steep falls the night before, jumping 8 to 13 basis points. . During the week, US and German 10-year yields were 21 basis points and 18 basis points lower, respectively, as the market began to focus on inflation fears in favor of recession fears.

Helping to lift risk sentiment, Shanghai’s mayor said the city aimed to begin an “orderly opening” by May 20, finally offering some light at the end of the tunnel. The first stage of this process was unveiled over the weekend, with supermarkets, department stores, hairdressers and pharmacies gradually reopening from today. Whether Shanghai can stay without a lockdown (and whether Beijing can avoid it) is another matter. The threat of a sudden lockdown will hang over people and financial markets, as long as China maintains its zero-Covid approach.

The negative impact of the lockdowns was visible in Chinese credit data for April, which showed new bank lending fell to just 645 billion yen, its lowest level since December 2017, while overall funding, a broader measure loans, was only 910 billion yen, its lowest level. level since February 2020. The drop in lending comes despite promises of support for the economy from the Chinese authorities, although the market has viewed the policy response so far as uninspiring. There is talk that the PBOC may cut its medium-term funding rate today, but the 10 basis point cut suggested by some economists will do little to move the economic outlook.

Friday’s shift in risk sentiment likely represents as much a correction of oversold conditions as anything else. Headwinds to global growth remain formidable, with central banks determined to aggressively hike rates to contain inflation, Europe facing an energy crisis as Russia threatens to cut gas supplies and China in the struggling with a major growth retardation as she attempts to eliminate Omicron. Strong rallies are common in bear markets. It would be a brave person to say that we have seen the stock bottoms.

A Bloomberg survey of economists showed the likelihood of a US recession in the next year was 30%, double what it was three months ago. If we are indeed looking at a possible recession in the United States next year, we can look at past experience to get an idea of ​​the extent of the fall in equities. Over the past seven recessions, the average peak-to-trough drop in the S&P500 has been 36%, implying that with the falls seen to date (around 16% from the peak), the market could be midway. -way to its sale. disabled. Of course, history is only a guide and this cycle is already quite different from recent ones, but it gives a general idea of ​​the potential magnitude if some commentators’ recession predictions materialize.

Fed Chairman Powell confirmed that the Fed plans to raise the key rate by 50 basis points at the June and July meetings, if the economy develops in line with its expectations. Powell acknowledged that getting inflation back on target could cause “some pain” while achieving a soft landing would be “quite difficult”, which most would agree is an understatement. Powell’s comments represent the first time he has acknowledged that the risk of recession is real. Earlier, San Francisco Fed President Daly confirmed that the Fed won’t be bailing out the stock market anytime soon, saying she “would like to see a continued tightening of financial conditions.” The market is pricing in exactly 100 basis points of increases at the next two Fed meetings and another 88 basis points by the end of the year.

In economic data, the market eyed another very weak reading of U.S. consumer confidence from the University of Michigan survey, which showed the index fell to its lowest level in more than 10 years. . Economists remain optimistic that consumer spending will hold up despite slumping levels of consumer confidence, as households sit on large savings balances built up during the pandemic.

In other news, the FT reported that the EU was optimistic it could convince Hungary, with financial incentives, to sign a proposed Russian oil embargo. Hungary, alongside Slovakia and the Czech Republic, suspended the planned oil embargo, even though the EU offered it a longer transition period to phase out imports of Russian oil. Oil prices jumped around 4% on Friday as WTI crude, which had traded below $100 on Tuesday night, ended the week at $110. Industrial commodity prices were also stronger on Friday, erasing some of their early week losses (copper -2.7% on the week).

In the weekend news, Finland and Sweden confirmed they would apply for NATO membership, which is likely to further inflame tensions with Russia.

It was a similar story in the currency markets, with commodity currencies heading higher on Friday. The AUD and NOK both gained more than 1% while the NZD recovered 0.9%, ending the week around 0.6285. Still, it was an overall negative week for the commodity currency complex amid rising global recession fears and rising risk aversion, with the NZD and AUD down around 2% even after their Friday rallies. The USD, which hit a 20-year high on Thursday on a DXY basis, was down 0.3% while the JPY was down 0.7% as US Treasury yields rebounded.

After a huge rally in recent months, New Zealand rates corrected significantly last week, with swap rates falling between 35 basis points, 2-year, and 25 basis points, 10-year. The market began to question the aggressive rate hike profile forecast for the RBNZ, given growing questions about the global economic outlook and further evidence of a sharp downturn in the New Zealand housing market. The 2-year swap rate, which reached 3.995% at the end of last week, fell another 9 basis points on Friday, to close at 3.55%. The market is still pricing a high probability of a 50 basis point move in next week’s meeting, but the implied probability of a 50 basis point move in subsequent meetings has been reduced.

The national highlight this week is Thursday’s budget and accompanying bond program update. Bond issuance is expected to increase, mainly due to the RBNZ’s decision to start selling its holdings of government bonds back to the Treasury from July, at an expected rate of $5 billion a year. Normally, a larger supply of bonds should put upward pressure on interest rates, all else equal, although New Zealand government bonds are expected to join the global government bond index later this year, likely leading to significant inflows into the market from foreign investors. , the impact is expected to be relatively modest.

In offshore data, the impact of China’s shutdowns is expected to be reflected in economic activity indicators released today, with retail sales expected to fall to -6.6% year-on-year in April from -3, 5% the previous month, and industrial production expected. to slow to just 0.5% YoY from 5.0%. In Australia, the key wage price index is released on Wednesday, with an upside surprise likely to fuel speculation of a 40-50 basis point RBA hike next month. Fed Chairman Powell will speak again later this week, although he is unlikely to deviate materially from his recent message.