Conflicting forces obscuring the direction of travel

5 min read 15 Aug 22

Summary: Both equities and bonds rallied in July as cooling economic data saw markets price in a less aggressive pace of rate hikes. Despite the hopes, the economic reality of high inflation and rising recession risk is creating a more pronounced challenge for central banks globally. Investment Specialist, Kirsty Clark reviews recent market performance and comments on the conflicting forces creating ongoing uncertainty.

After recording the worst first half on record, global equities rebounded in July, with technology and consumer discretionary stocks leading the market rally. The MSCI AC World Index finished the month up 7% in US dollar terms as markets started to price in less hawkish central bank actions, amid signs of slowing economic growth, and after some better-than-expected earnings results boosted investor sentiment. Global growth outperformed Global value, cyclicals outperformed defensives, and small caps pulled ahead of their large cap counterparts.

The tech-heavy Nasdaq and S&P 500 indices led equity markets higher in July, along with the FTSE 250 index of UK mid cap stocks. European and Japanese equities also posted solid gains in the month. Emerging market equities were among the weakest performers, with Chinese equities losing ground as renewed COVID-19 outbreaks prompted additional lockdown measures. 

Source: Refinitiv DataStream, 31 July 2022. Total Returns in USD.

At a sector level, technology (tech hardware and semiconductors) and consumer discretionary stocks outperformed, while more defensive areas including telecoms, consumer staples and healthcare lagged the wider market.

Bonds markets performed well across the board, with government bonds, investment grade and high yield rallying as market participants anticipated a pivot in central bank focus (from inflation to growth) and a potential slowdown in the pace of interest rate rises. The announcement of the ECB‘s new anti-fragmentation tool also contributed to positive performance among peripheral sovereign bonds.

Weakening demand and slowing growth cooled the commodities markets in July. Brent crude, gold and copper all finished the month down. However, European gas prices continued to rise on the back of supply-side concerns. Meanwhile, the US dollar strengthened against a basket of currencies, but marginally weakened versus the Japanese yen.

With inflation globally yet to be tamed and the prospect of recession looming, these push and pull factors are obscuring the direction of travel for the global economy.

The disinflation narrative in the US buoyed investor sentiment in July – as signs of peaking US inflation curbed fears of rapid interest rate hikes and a hard economic landing. To some extent, investors have been willing to suspend concerns around deteriorating economic growth, in the hopes that weaker near-term data points and some easing of pricing pressures would prompt a dovish pivot from central banks.

But, with the risks of recession rising (particularly in the Eurozone, where recession risk has reached its highest level since November 2020, as energy shortages threaten to put further upward pressure on inflation[1]), arguably, some pockets of the equity market are not pricing in the prospect of a more sustained growth slowdown.

In the first half of the year, developed market Composite Purchasing Managers’ Indices (PMIs) had remained in expansionary territory, but we started to see these roll over in July, leaving the Global Composite PMI Index almost flat at 50.9.

Source: Bloomberg, 31 July 2022.

Meanwhile, the International Monetary Fund (IMF) revised down its global growth forecast for 2022 to 3.2% in July from 4.4% at the beginning of the year, amid slowing growth in China and as the war in Ukraine continues to hit growth in the euro area in particular, along with commodity-importing nations.

While a relatively robust second-quarter earnings season undoubtedly boosted sentiment, corporate outlooks have been decidedly more cautious with, for instance, a number of consumer-related companies expecting more downtrading in the second half of 2022 as inflation continues to hit consumers’ wallets.

In the US, consumer spending data is not yet showing widespread signs of deterioration, with lower gas prices likely providing some relief and retailer discounting boosting goods spending, but according to data from the Bank of America Institute, median rent payments increased by 7.4% YoY in July, reducing the spending power of ca 34% of US households in rental accommodation, while card spending per household (which measures the spending activity of an average customer household) increased by 5.3% YoY in July, down from 5.7% in June[2].

Although supply-side bottlenecks look to be improving (port congestion in the US and Asia has eased, backlogs are clearing and delivery times are improving), raw material costs remain elevated and any further evidence of broadening demand weakness will add to the squeeze on corporate margins.

While moderating demand growth should help to temper inflation, upside risks remain – not least due to the potential for renewed rises in global energy and food prices and a surge in European gas prices amid supply constraints.

Despite the rising risk of recession, and the hopes of market participants looking for a pullback in the pace of rate hikes, with inflation still running hot – forecasted by the IMF to hit 6.6% and 9.5% in advanced and emerging market (including developing) economies, respectively, in 2022 – it feels premature for central banks to shift to a less aggressive phase of monetary tightening; a sentiment echoed by St. Louis Fed President Bullard when he said that the Fed would likely have to keep rates “higher for longer” to see a broad-based slowdown in price growth.

Source: Bloomberg, 31 July 2022.

Any flare up in geopolitical tensions also has the potential to add a further layer of complexity to an already challenging backdrop. For central bankers, the inflation-growth balancing act rumbles on and, for now at least, the conflicting push and pull forces continue to obscure the direction of travel.


[1] According to a recent Bloomberg survey of leading economists, conducted 5-11 August 2022. Respondents were asked about the probability of recession in the next 12 months. 60% of respondents now expect this outcome, versus 45% at the last survey.

[2] Bank of America Institute, available at: Consumer Checkpoint (


By Kirsty Clark

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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