Powell Tells Congress Rates to Rise Further

Global Economic and Capital Markets

A review of the week’s top global economic and capital markets news.

As of noon on Friday, global equities were lower on the week amid hawkish central bank action. After soft purchasing managers’ data were released on Friday, a large rally in German bunds dragged the yield on the US 10-year note lower, to 3.71% from 3.77% a week ago. The PMI data helped contribute to a $3 slide in the price of a barrel of West Texas Intermediate crude oil, to $67.75. Volatility, as measured by the Cboe Volatility Index (VIX), held steady at 13.6.


Fed chair says FOMC sees more hikes

US Federal Reserve Chair Jerome Powell, in his semiannual congressional testimony on monetary policy, told lawmakers this week that while the pace of Fed rate hikes has slowed, the central bank is likely to hike rates further this year. A strong majority of the members of the Federal Open Market Committee expect to hike rates twice more, Powell told the Senate Banking Committee on Thursday. Decisions will be made on a meeting-by-meeting basis, Powell said, while noting that there is a long way to go to get inflation back down to its 2% goal. He said that policymakers expect the unemployment rate to rise further but that he still sees a path to an economic soft landing,


US–China relations stay frosty despite Blinken visit

Chinese officials gave US Secretary of State Antony Blinken a cool reception when he arrived in Beijing for two days of talks this week, dubbing the meeting a “courtesy” and granting the secretary only a last-minute, half-hour discussion with President Xi Jinping. The US had hoped the visit would do more to restore communications channels between Washington and Beijing, but China was unwilling to restore direct military-to-military interactions, something the United States fears will increase the risk of accident or miscalculation in the crowded Taiwan Strait and South China Sea. News this week that China plans to station troops in Cuba, ostensibly to train local forces, did not help, nor did comments from President Joe Biden, who referred to Xi as a dictator. China protested that the president’s characterization was a provocation.


Central bank roundup: UK, Norway hike more than expected

Just a day after the United Kingdom reported stronger than expected inflation readings for May, the Bank of England raised its base lending rate 0.5% to 5%, more than the 0.25% hike markets had been expecting. Norway’s Norges Bank also hiked rates a half-percent on Thursday, to 3.5%. The Swiss National Bank hiked a more moderate 0.25% to 1.75% on Thursday but signaled additional hikes are likely. Turkey’s new central bank governor disappointed markets by hiking rates to 15% from 7.5% in a post-reelection reversal of President Tayyip Recep Erdoğan’s unconventional monetary policy. With Turkish inflation running at 39%, investors had expected a larger rise. China’s People’s Bank of China was the lone major central bank to lower rates this week, cutting the important loan prime rate 0.1% to 4.2% in an effort to lower borrowing costs and boost confidence and consumption.


Lack of inventory boosts US homebuilding

Confidence among US homebuilders rose in June as the National Association of Homebuilders sentiment index rose to 55 in June from 50 in May. With many homeowners holding mortgages with rates of about half of today’s 6.75% average, few are willing to move as the higher rates on new loans erode their purchasing power. That has led to very low inventories of existing homes, which has advantaged builders of new homes, who started 21.7% more homes in May than they did the year before. In contrast, existing home sales fell 20.4% in May from a year earlier.


The US Department of Education confirmed this week that student loan repayments will resume in October as the pandemic-era repayment moratorium is ending.


Taiwan Foreign Minister Joseph Wu called on the European Union to exert pressure on Beijing to deter a future conflict.


China’s State Council said Monday that it is considering various macroeconomic policies to boost demand and defuse risks.


Rising UK mortgage rates are raising concerns that property values could be undermined. However, Prime Minister Rishi Sunak has ruled out offering aid to mortgage holders, saying reducing inflation is the best way to address the problem.


The Financial Times reports that the contract between Russia’s Gazprom and Ukraine, which allows natural gas to transit through Ukrainian pipelines on its way to Europe, is unlikely to be renewed when the agreement expires at the end of 2024. About 5% of Europe’s gas imports are routed through Ukraine.


The US 2-year/10-year yield curve is close to its March lows (-108 basis points), with the 10-year Treasury note yielding 100 basis points less than the 2-year note. The last curve inversion this deep was in the early 1980s. A persistently inverted yield curve has historically forewarned of recession.


During Indian Prime Minister Narendra Modi’s state visit to the US this week, US officials offered India drone technology and access to jet engines in an effort to pry it away from its reliance on Russian military equipment and to counter China.


The Conference Board’s Index of Leading Indicators fell 0.7% in May, the 14th straight monthly decline.


The yen continued to weaken versus other major currencies this week, breaching 143 to the dollar, as Japan reported its highest core inflation rate since 1981, 4.1%. The Bank of Japan recently maintained its superloose monetary policy stance at a time when other central banks continued to lean hawkish. A further slide in the yen could force the BOJ to adjust its yield curve control policy.


Flash purchasing managers’ data released Friday show that the eurozone economy has stalled. The composite S&P Global PMI came in at 50.3. The manufacturing index slipped to 43.6 from 44.8 in May while the services measure declined to 52.4 from 55.1, an unusually large monthly deterioration.


S&P Global’s preliminary US composite PMI fell to 53 in June from May’s 54.3.

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.


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