Investors raise bets on central banks triggering global recession, and other economy stories to read this week

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Author: Gabi Thesing, Senior Writer, Forum Agenda

• This weekly round-up brings you the latest stories from the world of economics and finance.
• Top economy stories: Investors raise bets on global recession; El Niño and India farm payments cause rice prices to soar; Global factory activity slumps.

1. Investors raise bets central banks pushing global economy into recession

Bond investors are increasingly betting on central banks taking policy tightening too far and tipping their economies into recession.

Headline inflation is easing but underlying pressures remain high, keeping central banks like the US Federal Reserve, the ECB, the Bank of Canada and the Bank of England on high alert. Now yield curve inversion – where shorter-dated bonds offer higher returns than longer-dated ones – has deepened as yields on shorter maturities surge. This is generally interpreted that investors expect a recession.

In recent weeks, US 10-year Treasuries have been yielding less than two-year peers and hit their deepest inversion since the 1980s. German and British debt have followed similar patterns.

“What the yield curve is telling you is that this is extremely tight monetary policy,” Mike Riddell, senior fixed income portfolio manager at Allianz Global Investors, which manages 514 billion euros ($558.31 billion) in assets told Reuters. “We are positioned for a very big bond rally, and we think that risky assets are completely underestimating the risk of a recession or something nasty happening,” he added.

His sentiments are echoed by Daniel Ivascyn, chief investment officer at Pimco, the world’s largest active bond fund which manages $1.8tn of assets, who said he was preparing for a “harder landing” than other investors.

“The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks,” Ivascyn said in an interview with the Financial Times.

Canada has resumed tightening and Britain and Norway made big moves in June, while US Federal Reserve and European Central Bank officials have signalled more rate hikes.

2. Rice price surge on weather and India raising farm payments

Prices for rice, a staple food for almost half the world population, are set to rise as India increases payments to farmers and El Niño threatens output of key producers.

India produces more than 40% of world rice exports, but low inventories mean any cut in shipments will drive up food prices even higher. Erratic weather and Russia’s invasion of Ukraine last year have already made many staple foods unaffordable for poorer nations.

“India was the cheapest supplier of rice,” B.V. Krishna Rao, president of the Rice Exporters Association, told Reuters. “As Indian prices moved up because of the new minimum support price, other suppliers also started raising prices.”

For over 3 billion people, rice is a crucial staple. Almost 90% of the water-intensive crop is grown in Asia, where the El Niño weather pattern often causes disruptions in rainfall.

Yet, even before the weather phenomenon can affect production, the global rice price index of the Food and Agriculture Organization has been hovering above an 11-year high.

3. News in brief: Stories on the economy from around the world

Global factory activity dipped in June, as sluggish demand in the US, Asia, and Europe clouded the outlook for exporters, business surveys showed this week.

Investors are now betting that UK interest rates rise to a 25-year high of 6.5% by next March, Financial Times analysis shows. The peak in UK interest rates priced by swaps markets has risen dramatically in recent weeks, following the Bank of England’s unexpected decision to raise interest rates to 5% in June.

Eurozone business activity contracted last month across the bloc’s dominant services industry, adding to concerns after factory orders also slumped, HCOB’s final Composite Purchasing Managers’ Index (PMI) showed. It fell to 49.9 in June from May’s 52.8. A reading below 50 signals contraction.

Despite post-pandemic recovery momentum, China’s services activity expanded at its slowest pace in five months in June, the Caixin/S&P Global services PMI showed. It eased to 53.9 in June from 57.1 in May.

Consumer inflation in South Korea slowed ahead of expectations and reached a 21-month low, as oil and agricultural prices fell. Consumer prices rose 2.7% in June from a year earlier, compared with an increase of 3.3% in May and a median forecast of 2.85% in a Reuters poll.

Swiss inflation dipped to 1.7% in June, its government said on 3 July. According to the Federal Statistics Office, consumer prices increased by 1.8% compared to 2.2% in May. Economists expect the Swiss National Bank to raise rates once more.

India’s service sector growth, following a three-month low, remained resilient in June, according to the S&P Global India services PMI. It fell to 58.5 last month from 61.2 in May and was lower than a Reuters poll prediction for 60.2.

The United Arab Emirates saw increased business activity in June, as its non-oil sector expanded. New orders rose at the fastest pace in four years – to 56.9 in June from 55.5 in May – according to the seasonally adjusted S&P Global UAE PMI.

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