Central banks continue to aggressively raise interest rates. The focus today is on US inflation data

Уesterday, the yield curve for 2- and 10-year bonds approached the close since 2007, with the curve remaining inverted. The widening spread between 2-year and 10-year bonds signals a clear recession warning. “But Q2 results for banks should be solid, as it is too early for banks to make meaningful provisions for potential credit losses in the event of a potential U.S. recession,” Deutsche Bank said in a report.

Citigroup Inc expects the benchmark S&P 500 index (US500) to end the year at 4200 points, below the forecast made by the bank in late June (4700) and well above where it is now. Oppenheimer&Co. remains optimistic about the benchmark index, though last week, it lowered its target price from its previous forecast of 5330 points to 4800. Credit Suisse Group analysts revised their forecast for the S&P 500 Index (US500) to 4300 points at the end of the year. Morgan Stanley strategists expect the S&P 500 (US500) to reach its target of 3400-3500 points in the absence of a confirmed recession. However, if the economy does end up in a recession, the index could fall as low as 3000 points later this year.

The euro’s slide towards parity against the dollar was caused by a complex of problems: a different approach of the European Central Bank and the Federal Reserve System, the threat of a serious recession in Europe, and geopolitical uncertainty. Investors will have to reassess the EU’s economic prospects if Russia decides to limit gas supplies to the continent. A potential “dovish” reassessment of expectations on ECB rates could further increase the divergence of Treasury bond yields and other sovereign bonds. It could result in EUR/USD falling well below 1.

Oil fell to a three-month low as fears of a global recession escalated. The Organization of the Petroleum Exporting Countries (OPEC) noted new demand concerns, predicting that oil demand will grow slower in 2023. A rise in infections in China and approaching US inflation data are raising concerns about demand. West Texas Intermediate crude oil lost more than 8% and closed below $96 a barrel for the first time since early April. Money managers became more bearish on the major oil benchmarks, cutting their net long positions last week to their lowest level since 2020. The US lowered its forecast for oil production growth through 2023, citing inflation and labor shortages. Meanwhile, the White House on Monday urged OPEC to produce more oil, saying it believes the group of oil exporters can do so.

Gold prices continue to decline. Gold and silver prices are inversely correlated with the US Dollar Index and US government bond yields. Amid tighter monetary policy, the US Dollar Index is rising along with government bond yields, resulting in selling pressure on gold and silver prices. Many traders think gold is the best hedge against high inflation, but that doesn’t work in current market conditions.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) decreased by 1.77%, Hong Kong’s Hang Seng (HK50) lost 1.32%, and Australia’s S&P/ASX 200 (AU200) was up by 0.06% for the day.

The Central Bank of New Zealand raised its interest rate by 50 basis points to 2.5%. It is the sixth rate increase in a row. At the same time, the RBNZ made it clear that it is still happy with its planned aggressive tightening course. The RBNZ currently plans to raise the rate to 3.5% by the end of this year and to reach 4% by mid-2023.

South Korea’s Central Bank hiked its benchmark interest rate by half a percent to 2.25% on Wednesday, seeking to cut inflation from a 24-year high and balancing fears of a sharp economic slowdown amid falling business activity.