Concern over economic slowdown has markets mixed, EU inflation in focus

As monetary policy tightens and concerns about an economic slowdown grow, the global stock markets are experiencing mixed sentiment on Friday morning.

Central banks across the world are tightening their monetary policies in an attempt to tame the raging inflation. A 75-bp hike by the Federal Reserve was followed by a 50-bp hike by the Swiss National Bank on Thursday, whereas the Bank of England hiked its interest rates to 1.25% on the same day. 

A notable exception is the Bank of Japan, which stuck to its policy of setting 10-year yields near zero at its policy meeting earlier Friday. Even so, this hasn't eased concerns that inflation and rate hikes will continue to impede economic growth for years to come.

Markets in Europe are expected to start weakly on Friday after closing at a three-month low on Thursday, while US markets also experienced confusing trading, with the Nasdaq 100 closing at its lowest level since late 2020 as fears mounted that the US economy is headed for a recession, or could have already entered one after Q1 saw a contraction.

Weak Economic data

Despite the chronic housing shortage, the number of May's housing starts has slowed by 14.4%, according to data released on Thursday. A report released by the Philadelphia Fed showed the manufacturing sector is still experiencing a contraction in the region. Moreover, the number of claims for weekly unemployment benefits exceeded estimates for the week.

In addition to those figures, there are also several other recent ones: inflation at record highs, consumer confidence at a historical low, and retail spending falling amid dramatically higher prices. The weak economic reports have raised concerns about a slowing economy or a possible recession.

How rates hike will affect markets

With the central banks raising their interest rates consecutively, the US dollar is having competition from other currencies. This is due to the fact that the European Central Bank has also indicated that it is looking to start raising rates next month as well. After two days of decline, the dollar rebounded on Friday morning in Asia from a one-week low. Yet it is still far from its multi-decade peak of 105.

Inflation has skyrocketed well above the Fed's policy rate, meaning that rates will likely rise several times soon. However, yields on the 10-year bonds could be more closely related to the health of the economy, which could be adversely affected by higher rates. Consequently, a weakening economy and a possible recession will likely boost the demand for safe assets, such as Treasuries. Thus, yields may soon reach their peak.

Events of today

In the Eurozone, consumer price data will be released for May on Friday, which is expected to show an increase of 0.8% monthly and 8.1% yearly. Later in the session, Fed Chair Powell will speak, and investors may seek more clues on further policy action from the central bank. Market participants also await the industrial production figures for May, which are expected to fall from 1.1% in April to 0.4% in May. It can be interpreted as another sign of business activities slowdown.