The Day at a Glance | Jun 16 2022

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*Higher expected interest rate increases in the United States hike the risk of a recession to 72%: Bloomberg Economics.

*BoE increased rates to highest levels since 2009 (1.25%) and points towards greater increases if necessary; it revised its inflationary estimate to 11%.

*Sovereign debt yields in Europe increase after a surprising hike in rates on behalf of the Central Bank of Switzerland.

*Biden writes to oil companies, slams high profit margins and high prices for consumers.

*Markets increase bets on Yen in light of expectations that the BoJ will not be able to sustain its ultra-accommodative monetary policy.

*Wages (2.7% annual) and labor costs (3.2%) increased in the Eurozone during the 1Q22.

*Supply of Russian natural gas to Europe once again decreases; European companies have problems restoring inventories.

Economic environment

Fears of a recession. After the Federal Reserve announced its greatest interest rate hike since 1994 and forecasted a restrictive monetary policy towards the end of the year (with rates close to 3.4%; 175bp above their current level), markets and analysts have started to expect the United States to enter a recession by 2023 with a higher degree of probability. These expectations have been triggered by a recent slowdown in consumption, which is occurring simultaneously with one of the most aggressive interest rate increasing cycles in the last few decades. For example, retail sales in the United States made public yesterday showed that they receded for the first time in 5 months during May, which for many is a sign of the negative effects of high inflation. Additionally, consumer sentiment fell to 50.2 points in June, according to the University of Michigan – its lowest level in history (the indicator has been around since the late 1970´s), a sign that willingness to spend is deteriorating. The decrease in financial asset prices during the last few weeks could also be contributing towards lower consumer confidence as less wealth is perceived due to the impact that the depreciation of financial assets have on retirement funds. Lastly, there is high inflation and high interest rates will remain that way for a longer period of time: The FED expects rates to remain above 3% until 2024 as it acknowledged that it should not be complacent in its fight against inflation. Considering the fact that consumption is the US economy´s main growth driver, and credit its main fuel, fears of a recession have increased considerably. According to Bloomberg Economics, the likelihood of a recession in the United States is set at 72%.

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