What happened in Q2?

Here are some key themes from the second quarter of 2022:

Central banks hike rates to slow inflation: The second quarter was dominated by central banks aggressively raising policy rates as inflation remained persistently high. Inflation has become the bellwether for financial markets, with central banks now conceding that the post-COVID price rises are not transitory, and are here to stay – at least over the short to medium term.

This acknowledgement saw some sizeable interest rate hikes, beginning with the US Federal Reserve (‘the Fed’). After a 50 basis point rise in May, investors were prepared for a further 50 basis point hike in June, but the Fed somewhat surprised markets when it hiked by 75 basis points, the biggest single hike since 1994. While it’s widely accepted that interest rates need to move higher, one consequence of a swift period of tightening could be a hit to the economy, which many now fear is in for a slowdown. Nevertheless, Fed officials remain confident they can slow inflation without damaging the economy.

Elsewhere, the second quarter saw further interest rate hikes by the Bank of England and Bank of Canada, a surprise first hike of this cycle by the Swiss National Bank, while the European Central Bank (ECB) committed to begin lifting its policy rate in July, saying it will be the first in a series of interest rate hikes. “Beyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate,” the ECB said in its June policy statement.

Recession risks increase: As central banks embarked on tightening policy, concerns mounted that it could cause a slowdown in economic activity, and could even lead to a recession. A combination of higher interest rates, which increases companies’ borrowing costs, and rising input prices from inflation weighed on sentiment, with many consumer and business confidence surveys hitting record lows.

Economic data confirmed this when, in June, the Commerce Department revised down US first quarter GDP to an annual rate of -1.6%, its first quarterly drop since the second quarter of 2020.

The fear of a recession coupled with surging inflation have some drawing comparison to the 1970s and early 1980s when the Fed had to move interest rates higher to curb inflation, which caused a deep recession and a sharp rise in unemployment.

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