It was a week in which market behaviour began to shift away from fear of interest rates rises towards fear of recession. This was most evident in a recovery in government bond markets where, at the short maturities that most clearly reflect the expected path of interest rates, a dramatic shift could be seen. In the blink of an eye, seemingly, investors have shifted from being convinced that the US Federal Reserve will do multiple rate-rises, to being convinced that softening global growth will soon translate into weaker inflation, putting the Fed on hold. Markets are even now pricing in 0.75% in rate cuts in 2023. Bond values were driven upwards by a series of poor economic data, including more declines in consumer confidence around the developed world and an American survey of manufacturers that indicated a rapid decline in activity.

The American experience was repeated in Europe, where short-term German bonds registered upward moves seen only once a decade after German inflation fell for the first time since January. A closer look at the details, however, suggested that the fall was mostly due to one-off government measures, including a cut in fuel duty and the introduction of heavily discounted rail fares. Inflation in the Eurozone more broadly rose to 8.6% in June, which was above expectations, but even this did not dampen the enthusiasm of bond market analysts, who pointed to a decline in so-called “core” inflation, which excludes more volatile components. To complete the picture, gilts surged after a business activity survey showed that Britain’s manufacturing sector is also running out of steam.

Unfortunately, the waning of interest rate expectations did not boost stock markets, which became caught up in the fear of recession and its impact on corporate profits. It did not help that profit warnings are spreading from the retailers to other industry sectors and, in each case, fear of a slowdown in consumer spending is accompanied by fear that companies are holding too much stock just at the wrong time. This has the makings of a boom-to-bust cycle, the like of which has not been seen since the 1970s.

Given that economic data is published with a sizeable time-lag, the coming weeks are unlikely to assuage fears of impending recession. China did provide some respite, however, with indications that the authorities are inching away from the “Covid Zero” policy that has forestalled China’s recovery from the pandemic. Mandatory quarantine periods for travellers from abroad were halved, which prompted strong gains in Chinese travel and tourism stocks. Domestic travel restrictions were also eased, and business activity surveys showed that China’s economy is returning to health after the lockdowns of the last few months. Furthermore, in a widely-telegraphed move, the American government may also be about to roll back some of former president Trump’s tariffs. Together with the recent expressions of support from the domestic authorities, the hope is that China can mount an economic recovery large enough to move the needle for the entire global economy.