Markets were fairly buoyant for most of the week before a very strong US jobs report upon Friday doused investor hopes that the Fed might pause its interest rate hiking cycle. That left the S&P 500 and European indices more or less unchanged while Australia and Asian markets (which had closed by that time) eked out a 1%gain. This was an OK result given that long term rates started to head up again last week. With inflation expectations staying steady, one might have expected the uptick in real (after inflation) rates to have upset markets a little more but the largely positive earnings season has probably helped, especially as the market was braced for bad news. It all adds up to a fairly resilient economic picture. Most investors are now expecting a US recession but it's not showing up in the data. Central banks increasingly believe they need to engineer a recession, or at least the fear of one, to dampen economic activity and head off inflationary pressures which would have even more damaging implications in the long term. Nowhere was this more evident than in the UK where the Monetary Policy Committee raised rates by 0.5% while emphasising that they saw no way of avoiding a year long recession amidst crippling rises in gas prices. Mean while many commentators question whether raising interest rates would even be effective against supply side constraints and one might reasonably question whether higher rates in the UK will do much to dampen global demand for oil or induce OPEC to increase production, for instance. A global recession might do the trick though and in any case central banks, having acted too late to head off inflation can’t be seen to be sitting on their hands. Against this backdrop it was perhaps surprising to see markets, including that of the UK, remain so calm.

In the US, tech stocks continued to do the heavy lifting and energy stocks continued to fall along with the oil price and most other commodities. The oil price has fallen more than 20% in the last 2 months and is back to where it was before the invasion of Ukraine.  That is also true of wheat and in fact most other commodities across the metals, agricultural and energy sectors, which may suggest that markets have indeed already priced in the recession that we are in the middle of or are about to have, depending on who you talk to.  

If bond markets are pricing in a recession, it is a fairly modest version that leaves cashed up corporates relatively unscathed as credit spreads narrowed again last week. In Australia the market is also looking through all the talk of a consumer squeeze and falling house prices as bank share prices continued to recover and most other sectors were in positive territory apart from Energy and Real Estate Trusts.  Banks are now almost back to where they where at the beginning of the year while Consumer Discretionary, IT, Real Estate Trusts and Materials stocks are the only sectors to be significantly off their highs. This implies the equity market is hoping for a rebalancing type of recession where some belts are tightened but there are few forced real estate sellers.  This week we will find out if the corporate sector agrees as the local reporting season starts in earnest.  

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