Invesco’s Kristina Hooper: Recession or resiliency? For the US economy, its complicated

by | Aug 9, 2022

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For Bank of Canada, rates hikes may continue

Canada’s central bank seems to be a bit better at slowing its economy. Job losses in July’s jobs report were more than expected, albeit still modest. And average hourly wages, while still high, rose less in July than in June. But I suspect it will still be too high for the Bank of Canada, which is likely to continue raising rates despite its mega rate hike of 100 basis points just a few weeks ago. The Bank of Canada doesn’t appear poised to stop.

The Bank of England forecasts red-hot inflation

The chorus is singing “Don’t Stop Me Now” in the UK, but there, the song is about inflation. The Bank of England (BoE) surprised and dismayed some with its latest inflation forecasts. The BoE is now anticipating that inflation will peak at 13.3% in October — and that it will remain in double-digits into the second half of 2023.3 Yes, the BoE expects inflation to remain red-hot even as the UK economy is in recession.

That’s why the BoE had to bring out its jumbo-sized sledgehammer — hiking rates 50 basis points last week — which it hasn’t used in more than a quarter of a century. It seems reasonable to expect the Bank of England to hike another 50 basis points in September, although the demand outlook may restrict further hikes to 25 basis points.

As with other central banks such as the Fed and the European Central Bank, the BoE is in a delicate balancing act, trying to tame inflation without snuffing out its economy. And it could be attempting to perform this balancing act under great scrutiny if UK Foreign Minister Liz Truss, who is in the running, becomes the next Prime Minister, given her recent criticisms of the central bank.

The eurozone economy is under pressure

Inflation is also hot and doesn’t want to be stopped in the eurozone, although the eurozone economy is coming under very substantial pressure. It is going to be harder to stop eurozone inflation because most of it is not demand-driven, and so the ECB might “stop” the economy before it “stops” inflation.

The most recent manufacturing PMI was slightly in contraction territory, although the service sector PMI remains in expansion territory. However, Chris Williamson of S&P Global explained, “The eurozone economic outlook has darkened at the start of the third quarter with the latest survey data signaling a contraction of GDP in July. Soaring inflation, rising interest rates and supply worries — notably for energy — have led to the biggest drops in output and demand seen for almost a decade, barring pandemic lockdown months.”4

China seeks to calm its housing market

The lyrics of Queen’s mini rock opera would need to be edited for the property situation in China. The chorus could be: “Don’t stop paying your mortgage,” with the response being: “Then don’t stop construction.”

A significant portion of Chinese households have stopped paying the mortgage on their properties under construction because developers have stopped building the projects. China’s economy is still recovering from COVID lockdowns but is now facing headwinds from the property sector, so this will hopefully be resolved quickly. Policymakers are likely to strongly encourage consumers to pay their mortgages on time, lest they risk legal action from the banks, while also providing more liquidity to developers to restart dormant projects. We believe the government has the tools to ensure these risks don’t spread to the financial system.

Conclusion: Maintaining a long-term perspective

In conclusion, many central banks are on the move, and economic data can be quite concerning depending on the country. There will likely be more market volatility, especially given heightened geopolitical tensions and the potential for downward earnings revisions. I believe the best we can do as investors is maintain a long-term perspective. That means being well diversified across equities, fixed income and alternatives — and being tactically opportunistic if comfortable.

 

With contributions from Emma McHugh and David Chao

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