Markets Wrap (25 July – 8 August)

Stocks
With the Q2 reporting season approaching the end, 63.5% of S&P 500 companies have exceeded revenue forecasts, and 74.7% earned more profit compared with Bloomberg consensus estimates (year-over-year growth figures stood at 2.9% and 4.3% respectively). 
Strong Q2 results contributed to an improvement of the risk mood in the market, as indicated by falling SKEW index, which measures the price of protection against extreme negative outcomes (Chart 2).  
 

Bonds
According to FED St. Louis bank president J. Bullard, fears of a recession in the US are overblown, but the bond market seems to have a different view – the difference between 2y and 10y Treasury yields dropped to a record low of 43 bps (historically, inverted yield curve is considered to be the most accurate predictor of economic slumps). 
 

Macro 
The IMF scaled back its world economy growth forecast to 3.2% in 2022 and 2.9% in 2023; estimates have also been downgraded for the US and the Euro Area, whereas China's GDP is expected to increase by 3.3%, missing the official 5.5% target by a wide margin, and Russia is heading for a recession (-6.0%), albeit a much milder one than initially though (Chart 4). 
US July jobs report delivered a set of data which shows that the country's labour market remains overheated – 520 thousand of new jobs created in a month is more than double of the Bloomberg consensus estimate (250 thousand), both the level of unemployment (3.5%) and the average hourly earnings increase (5.2%) exceeded the forecasts (3.6% and 4.9% respectively). 
 

Central Banks 
The Bank of England, at its August meeting, delivered the first 50 bps key rate hike (to 1.75%) in 27 years, and warned of an upcoming recession that will begin in Q4 and last a little over a year; the Telegraph reported that if L. Truss is to become the UK's PM, she may push the BOE to abandon its 2% inflation target and instead focus on boosting the economy. 
Following ECB surprise rate hike by 50 bps, the market is pricing-in a 90% probability that an increase of the same magnitude will be carried out in September, as so far, all preliminary July inflation figures from the Euro Area's largest economies have surprised on the upside (Germany 8.5%, France 6.8%, Spain 10.8%).
 

Fiscal expenditure
In a major victory to the Democratic party before the upcoming November mid-term elections, the US Senate passed a 750 billion USD healthcare and climate change bill, which also encompasses a minimum 15% corporate tax and a 1% tax on stock buybacks; after a narrow 51-50 vote victory, a much smoother adoption is expected in the House of Representatives before President Biden signs it into a law.