Recession Worries Deepen

Weekly Wrap Content for the week of Jul 1:

1. Week 26 major indexes performance;

2. Week 26 US sector indexes performance;

3. Major indexes weekly charts of support and resistance levels;

U.S

For the week ended 1 Jul, U.S stocks surrendered a portion of the previous week’s strong gains, as worries grew that the Federal Reserve’s fight against inflation would push the economy into recession.

The S&P 500 Index closed out its worst first half of the year since 1970, as was widely reported, although the decline was amplified by the index reaching its all-time high on January 3. Typically defensive segments within the index, such as utilities and consumer staples, held up best, while consumer discretionary and information technology shares were particularly weak. Markets were slated to be closed on Monday, July 4, in observance of the Independence Day holiday. Refer to major indexes’ weekly performance tables below.

The S&P 500 Index ended the first half down about 20%, in bear-market territory, which historically is a signal itself that the economy is in a recession or one is pending. Since 1950, nearly 70% of bear markets coincided with recessions.

Key highlights for the week and outlook:

1.    Much of the week’s economic data missed consensus expectations, and some signals suggested that economic activity might even be slowing. May personal consumption expenditures (PCE), adjusted for inflation, fell 0.4% in May, the first decline in 2022. 

2.    The silver lining for investors in the PCE data was a downside surprise in inflation signals. The Fed’s preferred inflation gauge, the core (less food and energy) PCE price index came in at 4.7% for the 12 months ended in May, slightly below expectations and the lowest level since November. 

3.    The yield curve – the difference between the 10-year and two-year yield – has also flattened, now around 0.05%, closing in on 0.0% and even turning negative, or inverting. The flattening yield curve is certainly another signal of growth concerns ahead.

SPX sectors in play

Four out of 11 sectors in the S&P 500 recorded strong gains. Defensive sectors such as Utilities(XLE), Energy(XLE) and Consumer Staples(XLP) stocks outperformed this week. Consumer Discretionary(XLY) and Technology(XLK) stocks were among top losers. Refer to below sector indexes weekly performance table.

The sectors that have relatively outperformed this year, aside from energy, have been defensive parts of the market: utilities, consumer staples, and health care. These are traditionally considered "recession-proof," as households generally consume these items regardless of economic conditions.

Technically all three indexes are still in downtrend, their weekly charts are as follows.

DJI weekly chart

SPX weekly chart

Nasdaq weekly chart

China/HK

China markets advanced on the back of strong factory data and easing coronavirus restrictions for travelers. The broad, capitalization-weighted Shanghai Composite Index(SSE weekly Chart) rose 1.13%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, gained 1.6%.

On Tuesday, China halved the quarantine times for inbound travelers. Under the new policy, travelers must spend seven days in a quarantine facility then monitor their health at home for three days, down from 14 days under hotel quarantine in many parts of the country and as many as 21 days of isolation in the past.

In economic readings, the official manufacturing and services purchasing managers’ index (PMI) both rose above 50 in June as a drop in new omicron infections allowed the government to ease restrictions. The manufacturing PMI reached 50.2 in June, up from 49.6 in May, while the nonmanufacturing PMI rebounded to 54.7 in June from 47.8 in May.

Hang Seng index(.HSI weekly chart) closed up 0.65% the holiday-shortened week, it hit intra-week high since Apr 2022 on Tuesday but was down two days after that by profit-taking along other markets as recession worries deepened. Technical indicators remain bullish. It’s now trading above 20and 50dmas.

Singapore

STI index (STI weekly chart) appears flattish, edged down 0.52% slightly this week, closed near its three-week bottom 3100. Major technical support to watch at around 3050 level.