Last Monday Christine Lagarde announced the regulator’s intention to raise the policy rate by 25 basis points at the July meeting. She also said that the Central bank’s goal is to keep borrowing costs under control for the eurozone’s most indebted members. Curiously, in 2020 Lagarde said it was not the ECB’s task to “tighten spreads.” Will it help to avoid another debt Crisis? Only time will tell…
As for the macroeconomic outlook, the region’s annual inflation rate is expected to be 6.8% by 2022, 3.5% by 2023, and 2.1% by 2024. Lagarde also warned of the risk of a correction in Europe’s financial and real estate markets. Another issue we cannot overlook is the growing social instability. Over the past few weeks, there have been protests in several EU countries. In particular in Belgium over rising food and gasoline prices. In the United Kingdom, the transport union RMT calls for wage increases and the avoidance of planned redundancies.
In the US, meanwhile, the probability of a recession has risen from 28% in April to 44%. The worsening outlook is attributed to rising inflation, supply chain problems, tightening PCAs, and price shocks in commodity markets. The country’s unemployment rate is forecast to rise from 3.6% in May to 3.7% by the end of 2022 and reach 4.2% by the end of 2023. The consensus forecast also assumes inflation-adjusted U.S. GDP growth of 1.3% year-over-year in the fourth quarter (the April forecast was 2.6%).
In this context, one should follow the debt market. Last week, analysts at Fitch Ratings raised their default forecast for U.S. institutional leveraged loans by 25 basis points to 1.5-2% by the end of 2023. Fitch does not rule out that the default rate could rise to 2% or higher by 2024 if the difficult economic backdrop leads to a corporate downgrade. Total “concerning” loans amount to $178 billion (+8% quarter-over-quarter).
It is worth mentioning that last week S&P Global downgraded the rating of Chinese developer Greenland Holdings to “selective default”. The reason for the downgrade was the rescheduling of one of the developer’s bond issues. Apparently, Greenland Holdings agreed that the $488 million payment would be made in one year, on June 25, 2023. The developer needs to repay about $2.4 billion of overseas debt in the next 12 months.
With regards to this week, the key events include the speech of Jerome Powell and Christine Lagarde, the OPEC+ meeting, and the NATO encounter in Madrid. Last but not least, NIKE, Inc (NKE), Bed Bath & Beyond Inc (BBBY), and Micron Technology, Inc (MU) will release their latest quarter results.