Economic slowdown on the cards, UK, EU PMIs to watch

European markets are expected to pare losses after opening lower on Monday, taking their cues from a quiet session in Asia, while traders are waiting for Fed Powell speech later in the day. Chinese markets were down, and oil markets increased after Houthi rebels struck various Saudi Aramco oil fields across Saudi Arabia over the weekend.

Do the markets indicate policy error?

Stocks surged, and volatility fell last week, raising the question of how long they will last. Stock markets both north and south of the Atlantic posted their most successful week since 2020 last week. Volatility has dropped considerably from the levels experienced right after Russia invaded Ukraine.

Although China has vowed to support its markets and economy, the wait for further easing continues after Chinese banks left borrowing costs unchanged.

The bond market continues to show caution due to the war, and rising rates in the US Treasury yield curves have flattened, and portions are inverted, indicating a potential slowdown. The US 10-year Treasury yield climbed to about 2.18 percent.

Market watchers are on edge amid soaring inflation, a war in Europe, and a commodity shock, as the yield curve continues to flatten. Its predictive abilities become more apparent — despite Fed chief Jerome Powell's clear message that the likelihood of a recession in the next year "is not particularly elevated".

Stock market analysts put a positive spin on six rate increases by the end of 2022, in contrast with bond market analysts, who expect the economy to slow by the end of 2022. Bond traders believe the rate hikes will weaken the economy, which at the time is considered a policy error by Wall Street.

Events of the week

After a busy week for central banks and geopolitical events, things will slow down this week. Still, as for the rest of the week, Powell and Lagarde are due to speak today and tomorrow. We are also expecting more flash PMI readings from the EU and UK. The Swiss National Bank will continue monetary policy discussions later this week. Investors will also stay cautious about ongoing negotiations for a ceasefire that have slowed to a crawl.

Economic expectations, consumer sentiment, the Treasury yield curve, and investor sentiment all indicate a possible slowdown looming on the horizon.

While the European Central Bank announced last week that it would wind down its asset purchase programme this summer, it did not commit to when it will raise interest rates. Investors are waiting for Fed chair Powell to speak on Monday and Lagarde's speech on Tuesday to find a clue on the central banks’ next move according to rising energy prices and their pressure on the economy. As such, if the PMI survey shows that the economy is weaker than expected, rate hike bets may be cut back, and the euro could skid again after just recovering from 22-month lows against the dollar.

Fed Chair Jerome Powell will speak about the economy at the annual Association for Business Economics conference on Monday, after initiating what is expected to be an aggressive monetary policy tightening cycle.

On Wednesday, Powell is to participate in a virtual panel discussion at a summit hosted by the Bank for International Settlements.

Wednesday will be a busy day for the GBP with a bunch of data from the UK. Inflation figures will kick in in the morning, and BoE governor Bailey will speak ahead of the annual budget release. According to current predictions, UK preliminary PMIs will fall to 58.7 from 59.9 and service PMI will decline below 60 to 58. Also, retail sales reports are due on Friday, with forecasts of a sharp drop for all indexes. The retail sales index is seen to decline to 0.8% from 1.9%, which will be another indication of the economic stagnation. In April, slow economic growth may lead the BoE to take a less hawkish stance.

US housing market data will be released on Thursday and Friday. Additionally, it is expected that initial jobless claims will decrease to 211K from 214K in February, and core durable goods orders will fall by 0.1% from 0.7% in January.