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Tag: Monetary policy

  • Bank of England raises key rate to 5.25 percent

    Bank of England raises key rate to 5.25 percent

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    The Bank of England raised its key interest rate by a quarter point on Thursday to the highest since 2008, but shied away from a bigger hike, pointing to a recent decline in inflation that it expects to continue over the rest of the year.

    The hike takes the Bank Rate to 5.25 percent and is the 14th straight rise in a campaign of monetary policy tightening to head off the worst bout of inflation in 40 years. While it has come down from a peak of over 11 percent, headline inflation was still running at nearly 8 percent in June, nearly four times the level that the Bank defines as price stability.

    It threatens more pain for those with mortgages and tenants who face sharp increases in their rents as landlords try to pass on the increase in the costs of their own loans. Average two-year U.K. mortgage rates are now nearly 7 percent, according to real estate website Rightmove.

    The Bank repeated that it remained ready to raise rates further still if inflation pressures prove to be more persistent than currently expected. The risks of that appear finely balanced: U.K. wages are still growing at a rate that the Bank considers ‘unsustainable’, but there is increasingly clear evidence that the effects of last year’s spikes in energy and commodity markets are reversing. Factory gate prices, in particular, have fallen in five of the last seven months and are now effectively flat from a year earlier.

    Analysts had been split ahead of the meeting on how much the Bank would raise by, with a slim majority expecting a quarter-point hike and a substantial minority expecting a half-point.

    The pound had hit its lowest in over a month earlier Thursday in advance of the announcement, hurt by general risk-aversion in financial markets since Fitch downgraded the U.S.’s credit rating on Tuesday. That has had the effect of pushing up U.S. and global bond yields, making the dollar relatively more attractive in the short term. By 1305 CET, it was at $1.2637, down 0.65 percent on the day. Traders also pared back peak rate expectations to 5.75 percent.

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    Geoffrey Smith

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  • Interactive: Search for the latest PCE inflation trends of almost 400 items

    Interactive: Search for the latest PCE inflation trends of almost 400 items

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    The personal consumption expenditures price index, which is released by the U.S. Department of Commerce, is the Federal Reserve’s preferred measure of inflation. It is released each month and measures the change in prices of goods and services in the United States.

    The Fed uses core PCE, which excludes the volatile categories of food and energy, to help set monetary policy. The consumer-price index is another measure of inflation and is reported by the Bureau of Labor Statistics. 

    See more: MarketWatch’s breakdown of CPI inflation

    PCE measures the expenses of both urban and rural consumers by United States residents. According to the Commerce Department, the index “consists of the purchase of new goods and services from private businesses.” Though additional purchases are included, such as those from the government and expenditures by third-party payers on behalf of households.

    PCE by type of product is divided into three broad categories: durable goods, nondurable goods and services. 

    Use our searchable table to look up the most recent price data for almost 400 products reported by the the Commerce Department.

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  • U.S. inflation eases again, PCE shows. Prices rise at slowest pace in almost two years

    U.S. inflation eases again, PCE shows. Prices rise at slowest pace in almost two years

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    The numbers: The cost of goods and services rose a mild 0.2% in June as inflation eased again, but another measure of prices favored by the Federal Reserve showed somewhat less progress.

    Economists polled by The Wall Street Journal had forecast a 0.2% increase in the personal consumption expenditures index.

    The increase in prices over the past year slowed to 3% from 3.8% and touched the lowest level since October 2021, the government said Friday.

    The so-called core PCE rate of inflation, meanwhile, also rose 0.2% last month. The core rate omits volatile food and energy costs and is viewed by the Fed as a better predictor of future inflation trends.

    The rate of core inflation over the past year slowed a bit less to 4.1% from 4.6% in the prior month, but that still puts it at a more than two-year low. It’s still far above the Fed’s 2% target, however.

    Big picture: Inflation has slowed a lot this year due to falling energy and food prices, but the cost of living is still rising too fast to mollify the Fed or ease the financial pain of U.S. households.

    The Fed is expected to keep interest rates high through next year to bring inflation down closer to its 2% target. The danger is that higher borrowing costs could also slow the economy enough to tip the U.S. into recession.

    The latest PCE report is likely to give the Fed more reason for optimism, however.

    Looking ahead: “Inflation cooled, but held well above 2%, meaning the Fed can’t declare mission accomplished,” said lead U.S. economist Oren Klatchkin of Oxford Economics.

    Market reaction: The Dow Jones Industrial Average
    DJIA,
    +0.50%
    and S&P 500
    SPX,
    +0.99%
    rose in Friday trades. The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.953%
    slipped 3.96%.

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  • Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak

    Why U.S. stocks and bonds stumbled on talk of a Bank of Japan policy tweak

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    Worries about a possible policy tweak by the Bank of Japan threw a wet blanket on a stretched U.S. stock-market rally Thursday, with the Dow Jones Industrial Average snapping its longest winning streak since 1987 after the 10-year Treasury yield surged back above the 4% level.

    The Japanese yen also strengthened after a news report said policy makers on Friday would discuss a possible tweak to the Bank of Japan’s so-called yield-curve control policy that would loosen the cap on long-dated government bond yields.

    Nikkei, without citing sources, reported that BOJ officials would talk about the matter at Friday’s policy meeting and that the potential change would allow the yield on the 10-year Japanese government bond
    TMBMKJP-10Y,
    0.440%
    to trade above its cap of 0.5% “to some degree.”

    ‘Ultimate fear’

    Why is that a negative for U.S. Treasurys and, in turn, U.S. stocks?

    The “ultimate fear” is that Japanese investors, who have vast holdings of U.S. fixed income, including Treasury notes and other securities, “begin to see a higher level of yields in their own backyard,” Torsten Slok, chief economist at Apollo Global Management, told MarketWatch in a phone interview. That could prompt heavy liquidation of those U.S. positions as investors repatriate holdings to reinvest the proceeds at home.

    That dynamic explains the knee-jerk reaction that saw the 10-year U.S. Treasury yield
    TMUBMUSD10Y,
    4.004%
    surge more than 16 basis points to end above 4%, he said. Yields rise as debt prices fall.

    The surge in yields, in turn, saw stocks give up early gains, with U.S. indexes ending lower across the board.

    What is yield curve control?

    The Bank of Japan began implementing yield curve control, or YCC, in 2016, a policy that aims to keep government bond yields low while ensuring an upward-sloping yield curve. Under YCC, the BOJ buys whatever amount of JGBs is necessary to ensure the 10-year yield remains below 0.5%.

    Nikkei said a possible tweak would allow gradual increases in the yield above 0.5%, but would clamp down on any sudden spikes, allowing the BOJ to rein in fluctuations driven by speculators.

    Global market participants are sensitive to changes in YCC. The BOJ sent shock waves through markets in December when it lifted the cap from 0.25% to 0.5%. Investors were rattled by the prospect of the Bank of Japan giving up its role as the remaining low-rate anchor among major central banks.

    BOJ Gov. Kazuo Ueda in May said the bank would start shrinking its balance sheet and end its yield-curve control policy if a 2% inflation looks achievable and sustainable after many years of undershooting.

    Yen rallies

    The yield on the 10-year JGB has traded above 0.4%, but remained below the 0.5% cap. Continued interest rate rises by the Federal Reserve and other major central banks in the past year have raised worries that the 10-year JGB yield could test the limit, Nikkei reported. Those rate hikes, meanwhile, have added pressure to the yen, whose weakness is seen contributing to inflation pressures.

    The yen
    USDJPY,
    -0.02%
    strengthened following the report. The U.S. dollar was off 0.5% versus the currency, fetching 139.48 yen.

    The Dow Jones Industrial Average
    DJIA,
    -0.67%
    ended the day down nearly 240 points, or 0.7%, snapping a 13-day winning streak, while the S&P 500
    SPX,
    -0.64%
    declined 0.6% and the Nasdaq Composite
    COMP,
    -0.55%
    lost 0.5%.

    Japanese stocks have solidly outpaced strong gains for U.S. equities in 2023, with the Nikkei 225
    NIK,
    +0.68%
    up 26% so far this year versus an 18.7% rise for the S&P 500.

    See: Japan’s stock market is roaring 25% higher. These 4 things could keep the rally going.

    What’s next

    Investors are waiting to see what the Bank of Japan actually has to say.

    While the Nikkei report helped “exaggerate” a selloff in Treasurys, the market may be inoculated against bigger swings after the BOJ’s December adjustment to the rate band, said Ian Lyngen and Benjamin Jeffery, rates strategists at BMO Capital Markets, in a note.

    The analysts said they expect that “the magnitude of the follow through repricing in U.S. rates will be comparatively more contained than would otherwise be expected.”

    More recently, the weak yen has raised the cost of hedging long Treasury positions for Japanese investors. So a stronger yen resulting from a shift toward tighter policy would help make hedging costs for owning Treasurys less onerous for Japanese investors as well, Lyngen and Jeffery wrote, “which over the longer term may begin to make Treasurys more attractive to Japanese buyers and add to the list of sources for duration demand.”

    That could make U.S. debt more attractive to new Japanese buyers, Slok agreed.

    But that’s oveshadowed by the near-term worry, Slok said, that existing Japanese investors will be inclined to sell Treasurys. Flow data will be very much in focus if the Bank of Japan follows through on the apparent trial balloon floated in the Nikkei report.

    Investors will be watching, he said, to see “if the train is leaving the station.”

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  • Former Fed official Clarida backs another interest-rate hike this year

    Former Fed official Clarida backs another interest-rate hike this year

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    Former Federal Reserve Vice Chair Richard Clarida on Thursday said he thinks another interest-rate hike this year would be a wise move by the U.S. central bank.

    In an interview on Bloomberg, Clarida said the biggest risk for the Fed is to declare “mission accomplished” too early and having to restart rate hikes next year.

    “So if I were there, it would skew me to getting in that additional hike this year, and I think some members of the Fed will see it that way,” Clarida said.

    Fed Chair Jerome Powell said Wednesday that the Fed will decide what to do about interest rates on a “meeting-by-meeting” basis.

    Read: Fed no longer foresees a U.S. recession, highlights from Powell presser

    The Fed is forecasting that the unemployment rate will rise to 4.5% by the end of 2024 from 3.6% in June.

    That is still a forecast for recession because under the Sahm rule, created by former top Fed staffer Claudia Sahm, the start of a recession is signaled when the three-month moving average on the unemployment rate rises by 0.5 percentage points or more from its low during the past year.

    But Clarida said the Fed faces an alternative scenario where inflation picks up again early next year after slowing later this year.

    “If the Fed finds itself in March of 2024 with an unemployment rate of 4% and and inflation rate of 4% with some of that temporary good news [on inflation] behind them, they’re in a very tough spot,” he said.

    “I do think that’s a risk. It’s not the base case,” he said.

    The Dow Industrial Average
    DJIA,
    -0.61%
    was trading slightly lower on Thursday after 13 straight sessions in the green.

    The yield on the 10-year Treasury yield
    TMUBMUSD10Y,
    4.016%
    has risen to 3.97%, the highest level in two weeks.

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  • U.S. stocks drift higher as tech earnings, Fed rate decision loom

    U.S. stocks drift higher as tech earnings, Fed rate decision loom

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    U.S. stocks were modestly higher on Tuesday as the Dow’s winning streak continued for now, while investors waited for big tech company earnings after the bell and the Federal Reserve’s interest rate decision on Wednesday.

    How stocks are trading

    • The S&P 500 climbed 5 points, or 0.1%, to 4,560

    • The Dow Jones Industrial Average gained 12 points, or 0%, to 35,423

    • The Nasdaq Composite increased 51 points, or 0.3%, to 14,110

    On Monday, the Dow Jones Industrial Average
    DJIA,
    +0.21%
    rose 184 points, or 0.52%, to 35411, the S&P 500
    SPX,
    +0.30%
    increased 18 points, or 0.4%, to 4555, and the Nasdaq Composite
    COMP,
    +0.66%
    gained 26 points, or 0.19%, to 14059.

    What’s driving markets

    The Dow Jones Industrial Average is on an 11-session winning streak, its best run in more than six years, as hopes build that the Federal Reserve’s remaining interest rate hikes this year will not cause a recession as inflation cools.

    Whether the Dow can make it an even dozen days of gains and extend its rally even further to fresh 15-month highs will likely depend on the next few days containing corporate earnings reports and Fed comments.

    Dow components 3M
    MMM,
    +5.58%
    and Verizon Communications Inc.
    VZ,
    +0.60%
    both reported results before the bell. So did big name companies like General Electric
    GE,
    +5.97%
    and General Motors
    GM,
    -4.44%    .

    After the bell, come Microsoft
    MSFT,
    +1.18%
    and Visa
    V,
    -0.28%    ,
    with non-Dow member Alphabet
    GOOG,
    +0.11%
    also a highlight. Coca-Cola
    KO,
    -0.23%
    and Boeing
    BA,
    -1.67%
    are among those Dow members presenting their numbers on Wednesday.

    Investors will be want to hear from Alphabet and Microsoft about their cloud businesses, the ongoing impact and use of artificial intelligence and their general outlooks for American and global markets, David Sekera, chief U.S. market strategist at Morningstar, said in a phone interview.

    Meanwhile, equity markets are in “a little bit of a holding period” ahead of the events to come, he noted.

    Read also: IMF sees signs global economy is headed in the right direction

    Wednesday also sees the Fed’s latest monetary policy decision. The market is certain the central bank will increase its policy interest rate by another 25 basis points to a range of 5.25% to 5.50%.

    But investors are less sure of whether that will be the last hike of the current cycle, so the Fed’s accompanying statement and what Chair Jerome Powell says at his press conference will be the main drivers of bonds, equities and forex around the event.

    “Our view is the Fed is one and done,” Sekera said. Even with expectations that central banks will continue to “talk tough” on inflation, Sekera said Morningstar’s base case is that July’s 25-basis point hike is the last, while inflation continues to cool over the second half of the year. Rate cuts could occur as early as February, he said.

    At Vanguard, Andrew Patterson, senior international economist, said in a note that the Fed could reach its terminal rate “with 1 or 2 more hikes.” The central bank is “likely to remain on hold through at least the end of the year.  If inflation proves persistent, this may be a sign of a higher neutral rate and the Fed may need to go to 6% or beyond in order to bring inflation back to target,” he said.

    Others think there’s more rate hikes to go. “There is a great chance that the Fed will spoil your mood if you are among those thinking that this week’s rate hike will be the last for this tightening cycle in the U.S.,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

    Read also: ‘No chance we’re having a soft landing’: Stock-market strategist David Rosenberg gives Powell’s Fed no credit — and no mercy

    Meanwhile, helping underpin sentiment on Tuesday was a rebound in Chinese stocks, notably property developers after Beijing signaled support for the heavily-indebted sector.

    In other economic data Tuesday, home prices increased for the fourth consecutive month in May, according to the S&P Case-Shiller Index. May’s strongest price gains were in Midwest cities, but the overall gains underscore the ongoing lack of supply of homes.

    While home prices are rising, so is consumer confidence. One gauge on consumer sentiment reached a two-year high, according to data out Tuesday. The Conference Board’s index for July increased to 117.0, which was above economists’ expectations and up from a revised 110.1 last month.

    While mood is brightening, the index is still below pre-pandemic levels as consumers contend with the toll of high prices and rising interest rates.

    Companies in focus

    • General Electric Co.
      GE,
      +5.97%
      shares up more than 6% and approaching a nearly five-year high after second quarter results from the aerospace and renewable energy company that topped expectation. The company reported net income of $946 million, or 86 cents per share, from a loss of $1.25 billion, or $1.13 a share one year ago, while free cash flow and revenue also beat estimates.

    • Verizon Communications Inc.
      VZ,
      +0.60%
       shares are up more than 0.7% after the telecommunications company topped profit expectations in its latest earnings but came just below revenue expectations. The company reported $1.21 earnings per share, above FactSet consensus for $1.17 earnings per share.

    • General Motors Co.
      GM,
      -4.44%
      shares are more than 3% lower after the car maker delivered better than expected second quarter earnings and raised its guidance. The company had adjusted earnings per share of $1.91, topping the $1.86 consensus according to FactSet.  

    • 3M Co.
      MMM,
      +5.58%
      shares are more than 6% higher Tuesday after results showing the company booked a loss in connection with a litigation settlement over “forever chemicals.” But taking away the one-time charge, the company still topped adjusted profit expectations and raised its full-year outlook.

    • Spotify Technology
      SPOT,
      -13.68%
      shares tumbled about 12% Tuesday after the streaming giant easily surpassed subscriber-growth expectations for its latest quarter but failed to sport upside on its key financials.

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  • It’s too early to stop fighting inflation, Deutsche Bank CIO says

    It’s too early to stop fighting inflation, Deutsche Bank CIO says

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    Share

    Squawk Box Europe

    Christian Nolting, chief investment officer at Deutsche Bank, discusses the outlook for central banks’ monetary policy.

    03:31

    27 minutes ago

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  • A Buoyant Global Economy Is Starting to Sag

    A Buoyant Global Economy Is Starting to Sag

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    A Buoyant Global Economy Is Starting to Sag

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  • Why markets are misjudging the Fed’s ability to raise rates even though inflation is slowing

    Why markets are misjudging the Fed’s ability to raise rates even though inflation is slowing

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    Parts of the financial markets are struggling to adapt to the idea that the Federal Reserve might keep raising interest rates even after this week’s data clearly pointed to decelerating inflation.

    Late Thursday, Federal Reserve Gov. Christopher Waller indicated he remains unmoved by June’s consumer price index and that he supports two more rate hikes this year even though monthly core inflation was just 0.2%, or half of what was seen in May.

    By Friday morning, parts of fixed-income markets “refused to play along,” with rates on overnight index swaps pricing in “just one more hike, not two — suggesting still that the Fed’s hawks have lost some of their credibility,” said Thierry Wizman, Macquarie’s global FX and currencies strategist.

    The bottom line from Waller’s speech is that it’s not solely inflation data that’s driving the Fed’s decisions, complicating the assessments made by traders and investors from here. Policy makers want to make sure that the recent deceleration in inflation feeds through broadly across goods and services sectors, and doesn’t revert back to persistently high core readings, according to the Fed governor. What’s more, “the robust strength of the labor market and the solid overall performance of the U.S. economy gives us room to tighten policy further,” he said.

    Some important corners of the financial markets did respond to his remarks, namely the Treasury market. Treasury yields were broadly higher on Friday, with the policy-sensitive 2 year yield
    TMUBMUSD02Y,
    4.733%
    jumping off a one-month low, as fed funds futures traders boosted the likelihood of a post-July rate hike by November. Traders now see a 30.1% chance that the fed funds rate target will either get to 5.5%-5.75% or higher in four months — up from a current level of 5%-5.25% and after factoring in a widely expected quarter-of-a-percentage-point hike on July 26.

    However, equity investors were largely focused on other things. U.S. stocks
    DJIA,
    +0.36%

    SPX,
    -0.15%

    COMP,
    -0.34%
    mostly reacted to Friday’s batch of good earnings reports from major banks, as well as fresh data from the University of Michigan. Meanwhile, the U.S. Dollar Index
    DXY,
    +0.16%    ,
    which typically reacts to changes in U.S. interest-rate expectations, was up by just 0.1% after dropping earlier in the day.

    “Inflation coming down has led to market anticipation that the Fed does not have much more tightening to do,” said David Donabedian, chief investment officer of CIBC Private Wealth US, which has $94 billion in assets under management and administration. “And the big banks are looking solid with recent earnings reports. While this might be a short-term swing in sentiment, the market is not fighting the optimism and seems to be pricing in economic nirvana,”

    “While we are pleased to see progress on the inflation front, we continue to have concerns about a weakening economy and lower demand that would result to a challenge for corporate earnings,” Donabedian wrote in an email. “There are some economic indicators that look good — like jobs — but these are telling us how the economy is doing yesterday and today. They don’t predict the future.”

    As of Friday afternoon, stocks were headed for their fifth day of gains, helped partly by the optimism unleashed from Wednesday’s consumer price report and Thursday’s producer price data. All three major U.S. stock indexes opened higher — brushing aside Waller’s comments — and pared gains only after data from the University of Michigan showed 5-10 year inflation expectations rising this month.

    Waller’s speech, delivered to the Money Marketeers of New York University, clearly articulates areas that investors may be missing in their assessments of where the Fed could go with rates, analysts said. In his mind, the impacts of policy tightening from last year “are feeding through to market interest rates faster than typically thought.” In addition, Waller said, households and firms appear to be adapting more rapidly to the dramatic, fast pace of interest-rate changes seen since March 2022.

    “If one believes the bulk of the effects from last year’s tightening have passed through the economy already, then we can’t expect much more slowing of demand and inflation from that tightening,” Waller said in his prepared comments.

    “To me, this means that the policy tightening we have conducted this year has been appropriate and also that more policy tightening will be needed to bring inflation back to our 2 percent target,” he said. “Pausing rate hikes now, because you are waiting for long and variable lags to arrive, may leave you standing on the platform waiting for a train that has already left the station.”

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  • Fed’s Waller, unimpressed by inflation data, calls for two more rate hikes this year

    Fed’s Waller, unimpressed by inflation data, calls for two more rate hikes this year

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    Federal Reserve Board Gov. Christopher Waller said Thursday he was not swayed by June’s benign consumer inflation data, and said he wants the central bank to go ahead with two more 25-basis-point rate hikes this year.

    “I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target,” Waller said in a speech to bond-market experts, known as The Money Marketeers of New York University.

    That would bring the Fed’s benchmark rate to a range of 5.5%-5.75%.

    Waller said that, while the cooling of CPI data for June was welcome news, “one data points does not make a trend.”

    “The report warmed my heart, but I have got to think with my head,” Waller said.

    He noted that inflation slowed in the summer of 2021 before rocketing higher.

    In his remarks, Waller said he is now more confident that the contagion from the collapse of Silicon Valley Bank in March will not create a significant problem for the economy.

    “I see no reason why the first of those two hikes should not occur at our meeting later this month,” he said.

    Traders in derivative markets have priced in high odds of a rate hike after the Fed’s meeting in two weeks. But traders have been skeptical the Fed will follow through with a second hike, even before the soft CPI data.

    Waller said the timing of the second hike depends on the data.

    “If inflation does not continue to show progress and there are no suggestions of a significant slowdown in economic activity, then a second 25-basis-point hike should come sooner rather than later, but that decision is for the future,” he said.

    During a question-and-answer session, Waller stressed that September was a “live meeting,” meaning the Fed could hike rates at that time.

    Some economists had thought the Fed was moving to an “every-other-meeting” pace of hikes, but Waller said he did not favor such mechanical moves, and that data should be the deciding factor.

    Some Fed officials want the central bank to hold rates steady in July, and perhaps through the end of the year, thinking the economy is going to be hit by “lagged” effects from past rate hikes.

    Waller said he believes the bulk of the effects from last year’s tightening have passed through the economy already.

    “Pausing rates now, because you are waiting for long and variable lags to arrive, may leave you standing on the platform waiting for a train that has already left the station,” he said.

    The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.786%
    has fallen to 3.77% this week after a lower-than-expected gain in jobs in the June report and the cooling of inflation. The yield had hit a recent high of 4.07% ahead of those softer reports.

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  • Key US inflation gauge cooled last month to the lowest level in nearly three years | CNN Business

    Key US inflation gauge cooled last month to the lowest level in nearly three years | CNN Business

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    Minneapolis
    CNN
     — 

    Wholesale inflation continued its yearlong slowdown last month, rising by just 0.1% for the 12 months ended in June, according to the Bureau of Labor Statistics’ Producer Price Index released Thursday.

    The PPI index, a key inflation gauge that tracks the average change in prices that businesses pay to suppliers, has cooled significantly since peaking at 11.2% in June 2022 and has now declined for 12 consecutive months. Annual producer price inflation is at its lowest level since August 2020, BLS data shows.

    Economists were expecting an annual increase of 0.4%, according to Refinitiv.

    On a monthly basis, prices increased by 0.1%.

    Goods prices held steady for the month, after tumbling 1.6% in May, according to the BLS report. As such, prices for services — which increased 0.2% from May — were the primary driver behind June’s slight increase.

    PPI is a closely watched inflation gauge since it captures average price shifts before they reach consumers and is a proxy for potential price changes in stores.

    While the PPI doesn’t directly correlate into exactly what will come from the following month’s Consumer Price Index — a major inflation gauge that tracks price shifts for a basket of goods and services — it provides a look at whole economy inflation, minus rents, said Alex Pelle, Mizuho Securities US economist.

    And that picture right now is looking pretty sharp.

    “It’s definitely a good month for inflation,” Pelle told CNN. “You saw that in CPI, and now you’re seeing it in PPI.”

    In June, inflation as measured by the CPI cooled to 3% annually, its lowest rate since March 2021, the BLS reported Wednesday.

    Both the CPI and PPI have declined monthly since their peaks in June 2022, when record-high energy and gas prices fueled the spikes to 9.1% and 11.2%, respectively.

    As such, the base effects of year-over-year comparisons are playing a part in the indexes’ sharp retreats.

    Still, underlying inflation is showing a cooling trend as well — albeit more muted.

    In the case of PPI, when stripping out the more volatile categories of food and energy, this “core” index rose 2.4% for the 12 months ended in June. That’s a step back from the 2.6% increase seen in May and economists’ expectations of 2.6%.

    Core PPI, which ticked up 0.1% on a monthly basis, is at its lowest annual level since February 2021.

    Inflation is looking a heck of a lot better than last year, when the Federal Reserve embarked on a campaign to combat price hikes with rate hikes, but economists don’t expect the latest CPI and PPI prints will dissuade central bankers from giving another crank to tighten monetary policy.

    Starting in March 2022, the central bank rolled out 10 consecutive interest rate hikes to tame inflation, finally hitting pause last month. The Fed is widely expected to raise rates by another quarter point when it meets later this month.

    “[The June data] means that the doves are going to have a little bit better of an argument to hold sooner rather than later, so that does reduce the probability of a second hike this year,” Pelle said, noting the commonly used terms to describe Fed members’ differing monetary policy approaches.

    Doves tend to favor looser monetary policy and issues like low unemployment over low inflation, while hawks favor robust rate hikes and keeping inflation low above all else.

    But just how long a hold could last is another matter, said Pelle.

    The job market is cooling from a scorching state, but it remains historically hot and tight. Considering ongoing demographic shifts (including the massive Baby Boomer generation aging out of the workforce), that tightness could continue, Pelle said.

    “Do we really need to be cutting rates if you have GDP running around trend and the labor market still very tight,” he said. “Inflation is coming down, but the economy is maybe growing a little bit into these higher rate levels. So the hold could be longer than people expect. But we might have some of the sting out on getting even higher.”

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  • U.S. stocks rise as bulls get ‘wish’ on inflation report, yet soft landings for Fed are ‘pretty improbable’

    U.S. stocks rise as bulls get ‘wish’ on inflation report, yet soft landings for Fed are ‘pretty improbable’

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    Markets seem to be embracing the notion of a soft landing for the U.S. economy despite inflation remaining above the Federal Reserve’s 2% target.

    “Soft landings are not impossible, but they’re pretty improbable,” said Bob Elliott, co-founder, chief executive officer and chief investment officer at Unlimited Funds, in a phone interview. “They’re particularly challenging in an environment where the labor market is tight,” he said, and yet  “many investors are sort of enamored with this idea that we could get a soft landing.”

    The U.S. stock market was rising Wednesday after fresh data showed inflation rose in June slightly less than expected. Meanwhile, the unemployment rate remains low in the U.S., with wage growth helping to fuel consumer spending in an economy that grew at a revised 2% annualized pace in the first quarter.  

    “There’s a race going on between the Fed slowing the economy down, and then on the other side, inflation becoming entrenched,” said Elliott. In that race, the Fed has been “one or two steps behind,” he said, ahead of Wednesday’s inflation reading.

    The consumer-price index showed U.S. inflation rose 0.2% in June for a year-over-year rate of 3%, according to a report Wednesday from the Bureau of Labor Statistics. Core CPI, which excludes energy and food prices, increased 0.2% last month for a year-over-year rate of 4.8%. The Bureau of Labor Statistics said core inflation’s rise in June marked the smallest monthly increase since August 2021. 

    “The Fed will see the June CPI report as progress, but they are still very likely to raise the target rate a quarter percent at their decision in July,” Bill Adams, chief economist for Comerica Bank, said in emailed comments Wednesday. “The Fed would rather overtighten and slow the economy more than necessary than under-tighten and risk inflation accelerating when the economy regains momentum.”

    Many investors have been expecting the Fed to hike its benchmark interest rate by a quarter percentage point at its policy meeting later this month, which would bring it to a targeted range of 5.25% to 5.5%. Federal-funds futures on Wednesday pointed to a 92.4% probability of such a rate hike and a slightly more than 80% chance of the Fed then pausing at its next meeting in September, according to CME FedWatch Tool, at last check.

    After the expected increase in July, traders in the fed-funds-futures market were on Wednesday largely expecting the Fed to hold rates steady for the rest of the year.

     “The bulls get their wish – CPI print came in better than expectations,” said Rhys Williams, chief strategist at Spouting Rock Asset Management, in emailed comments Wednesday. “We think the danger now is that the Federal Reserve does one too many rate increases and the soft landing turns into something harder.”

    In Elliott’s view, both the stock and bond markets lately appeared to be embracing the idea of a soft landing for the economy.

    The yield on the two-year Treasury note, which recently has been trading below the Fed’s benchmark rate, tumbled after the CPI report was released Wednesday. Two-year yields
    TMUBMUSD02Y,
    4.758%
    were down about 16 basis points around midday Wednesday at 4.73%, according to FactSet data. 

    “As the Fed has moved interest rates to very restrictive levels thus far, and probably will execute another hike or possibly two from here, we think that patience should be a real virtue in their overall disposition toward ongoing monetary policy,” said Rick Rieder, BlackRock’s CIO of global fixed income and head of the firm’s global allocation investment team, in emailed comments Wednesday. “Today’s CPI report for June displayed notable moderation, which is good news for policy makers, markets and households overall.”

    U.S. stocks were up Wednesday afternoon, with the S&P 500
    SPX,
    +0.83%
    gaining 0.7% while the Dow Jones Industrial Average
    DJIA,
    +0.39%
    rose 0.4% and the Nasdaq Composite
    COMP,
    +1.15%
    advanced 0.9%, according to FactSet data, at last check. The stock-market’s fear gauge, the Cboe Volatility index
    VIX,
    -7.28%    ,
    was down more than 7% at 13.8 around midday Wednesday.

    Read: S&P 500 is most likely going to correct back to 4,100, Mizuho warns market bulls

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  • ‘There’s nothing in the data that shows prices crash’: America’s housing market is showing remarkable resilience

    ‘There’s nothing in the data that shows prices crash’: America’s housing market is showing remarkable resilience

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    The housing market may feel out of whack to home buyers coping with fast-rising home prices and 7% mortgage rates. But like it or not, the housing market is in the pink of health. 

    Several economic indicators that measure housing activity — from home prices to sentiment surveys — show that home builders and sellers (the few that are out there) are finding strong demand from home buyers. 

    News of the housing market’s relative health may be welcome to some — like real-estate agents and investors — but it’s becoming a concern for economists. The more buoyant the housing market, economists say, the more likely the U.S. Federal Reserve will unveil another interest-rate hike, which further heightens the risk of a recession.

    “‘The housing market has started to recover, and this is a problem for the Fed because more demand for housing will boost home prices and rents.’”


    — Torsten Slok, chief economist at Apollo

    “The housing market has started to recover, and this is a problem for the Fed because more demand for housing will boost home prices and rents,” Torsten Slok, chief economist at Apollo, wrote in a note in May. And housing is a big part of how the government measures inflation, he added. This will make it more difficult to reduce inflation from 5% to the Fed’s 2% inflation target, he said.

    If the Fed launches another rate hike, it would push mortgage rates, which are already in the 7% range, to go even higher. 

    “The housing market is in a very — if fragile — recovery,” Mike Simonsen, founder and president of real-estate analytics firm Altos Research, told MarketWatch. 

    “There appears to be more demand than available supply for homes, especially in the real-estate market,” he explained, which is keeping home prices high, but that doesn’t mean demand could evaporate if the current situation changes. Recall when rates doubled from pandemic-era lows in 2021 to 7% last year, which zapped home-buying momentum.

    House hunters have adjusted their expectations. But if rates were to jump from 7% today to even higher levels, “I would not be at all surprised if homebuyers stopped abruptly again,” Simonsen said, stating his thesis for the fragility of the sector. Americans broadly expect rates to go over 8%, according to a March survey by the New York Federal Reserve.

    MarketWatch looked at three housing-market indicators — and the picture looks rosier than ever:

    Active listings are down — blame interest rates 

    Redfin’s deputy chief economist, Taylor Marr, said his go-to indicator was active listings. 

    Active listings are down this spring, compared to the previous year, according to the company’s data. At the end of June, the number of homes listed for sale on the market was down 8.1% over the prior year.

    “It really captures that supply is pulling back significantly relative to demand,” Marr said.

    About 14 million mortgages were refinanced during the COVID-19 pandemic. Few homeowners find it in their interest to sell their home and give up an ultra-low mortgage rate they secured during that time. Selling a home in July 2023, and purchasing a new one may entail taking a mortgage rate in the 7% range.


    Redfin data says that active listings of homes are down.

    As a result, the housing market is seeing an excess of demand and not enough supply, which has led to a resurgence of bidding wars in some parts of the U.S.

    While this metric is showing signs of the housing market returning to life and heating up amid a shortage of houses for sale, Marr said he’s not yet ready to call it a recovery. “It’s hard to declare completely the bottom of the housing market,” he said.

    Still battle-scarred by the housing crash of the Great Recession, Marr said economists “might be hesitant” to say that the housing market is in recovery mode. “We still have a lot of uncertainty with the economy ahead,” he added. “If the economy really takes a turn three or four months from now for whatever reason, it could certainly bring the housing market back lower than it was even last November,” he added.

    The price gap between new and existing homes

    With a major shortage of resale homes, new-home sales have been taking off. 

    Home builders, understandably, are thrilled about the inventory shortage. 

    The National Association of Home Builders measures builders’ sentiment in a monthly index, and that indicator has been very cheery of late. In June, the index turned positive for the first time in nearly a year. Builders were scaling back price reductions; they were happy about current sales conditions as well as sales over the next six months, the NAHB said.

    “A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year,” said Rob Dietz, chief economist of the NAHB.

    One of the major U.S. home builders, Lennar, also offered some commentary on its second-quarter earnings call last month. The company’s executive chairman, Stuart Miller, said that “the market and the economy will remain constructive for home builders as pent-up demand continues to come to market and consume affordable offerings.”

    Miller also doesn’t expect the supply issue to be fixed anytime soon: “We believe that the supply constraint will continue to limit available inventory and maintain supply-demand balance,” he said on the call. “The core elements of the supply shortage will not resolve in the near term as the almost 15-year production deficit will take years to resolve.”

    Home-builder confidence, as a result, is signaling high optimism about the future of the housing market, and a return to normalcy.

    As a result, housing starts have spiked as builders scramble to meet the demand. 


    Builders have ramped up building new single-family and multi-family homes.

    Ali Wolf, chief economist at Zonda, looks at how prices of new homes trend relative to resale homes as a key indicator of the health of the housing market. Her conclusion? Housing industry professionals involved in the construction and sale of new homes are out of a recession, given the robust demand. 

    In fact, demand has been so strong that new homes — generally considered to be more expensive than resales — have become more affordable in home buyers’ eyes given the competition in the existing home space. 

    Typically, new homes are 20% more expensive than resales, Wolf said.  And today? That spread has fallen to 4%. 

    So what’s going on? Builders are not necessarily slashing prices. Instead, existing home prices have risen as homeowners are reluctant to sell.

    That’s a good deal for buyers. New homes, Wolf said, are traditionally considered a “luxury good.” They’re brand new, and buyers can often customize them. They also require less maintenance than older homes.

    Sellers are holding out on cutting prices

    Simonsen, who leads Altos Research, said price cuts were his go-to indicator to gauge the health of the real-estate market. Specifically, price cuts formed a proxy for demand, he explained.

    “When the houses are on the market, if there are no buyers for the current houses that are listed, people start taking price cuts,” Simonsen said. 

    And to be clear, price cuts jumped last year, when rates jumped, he added. 

    But that dynamic has since changed, as seen in the chart below. “There are currently fewer price reductions now than in 2018 or 2019,” Simonsen said.


    Data from Redfin says that homeowners aren’t cutting prices on their homes when selling, possibly due to strong interest from buyers.

    And for those of you holding out for home prices to crash? Keep waiting, Simonsen said.

    “There’s nothing in the data that shows prices crash,” he said. Even if a recession hits at the end of the year, which results in more job layoffs, demand for home-buying falling, and an increase in foreclosures and distress, that’s still a few years from now, he added. 

    “There’s no signal of home prices crashing anywhere,” Simonsen added.

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  • Could the June CPI report change the Fed’s rate trajectory? | CNN Business

    Could the June CPI report change the Fed’s rate trajectory? | CNN Business

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    A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.



    CNN
     — 

    After the June jobs report showed a cooling but still-hot picture of the labor market, investors are looking to a key inflation report due Wednesday for more clues on the economy’s health. But some investors say the results will likely do little to sway the Federal Reserve’s interest rate trajectory.

    What happened: The labor market added just 209,000 jobs in June, below economists’ expectations for a net gain of 225,000 jobs. That’s the smallest monthly gain since a decline in December 2020.

    But beneath the surface, the jobs market remains hot. Average hourly earnings growth remained steady at 0.4% from May and also unchanged at 4.4% year-over-year, suggesting that wage inflation remains sticky. The unemployment rate also fell to 3.6% from 3.7%, though jobless rates for Black and Hispanic workers rose sharply.

    There is “nothing in the release that would change our expectation that the Fed has more work to do,” said Joseph Davis, global chief economist at Vanguard.

    Accordingly, traders continued to overwhelmingly expect a quarter-point rate hike at the Fed’s July meeting. Traders saw a roughly 92% chance of such a decision as of the market close on Friday, according to the CME FedWatch Tool.

    What’s next: The June Consumer Price Index report, a key inflation reading, is due on Wednesday.

    Economists expect a 3.1% increase in consumer prices for the year ended in June, which would be a cooldown from a 4% annual increase in May, according to Refinitiv.

    Recent data has suggested that inflation is coming down, though it remains above the Fed’s 2% target. The Personal Consumption Expenditures price index, the Fed’s favorite inflation gauge, rose 3.8% for the 12 months ended in May. That’s down from the revised 4.3% annual rise seen in April.

    But it’s unlikely that the June CPI report will change the Fed’s interest rate trajectory, barring a huge upside or downside surprise, especially considering that Fed officials in recent weeks have been vocal that more rate hikes are likely coming, said James Ragan, director of wealth management research at DA Davidson.

    Still, that doesn’t mean investors should expect infinite rate hikes from the Fed.

    “We continue to expect that [the] Fed will soon reach its terminal rate, bringing it closer toward the end of its most aggressive tightening campaign in generations,” said Candice Tse, global head of strategic advisory solutions at Goldman Sachs Asset Management.

    The Producer Price Index report for June is due on Thursday.

    UPS and the Teamsters union are in contract negotiations. Without a deal, 340,000 Teamsters could go on strike on August 1.

    Such an event could be damaging to the US economy, reports my colleague Chris Isidore.

    UPS carries 6% of the country’s gross domestic product in its trucks. The company carried an average of 20.8 million US packages a day through last year, and that number is down only slightly this year.

    In other words, the company’s services are critical to keeping the gears moving seamlessly in supply chains that saw massive snarls during the height of the Covid pandemic. A strike could potentially bring back the problems that were so prominent just a couple years ago, including shipping delays and higher prices.

    The Biden administration is keeping an eye on negotiations between both parties in “recognition of the role UPS plays in our economy and of the important work that UPS workers did through the pandemic and continue to do today,” acting labor secretary Julie Su told CNN on Friday.

    But the company and union broke off last week, with both sides claiming the other walked away from the bargaining table.

    Read more here.

    Monday: Consumer credit for May and NY Federal Reserve’s Survey of Consumer Expectations for June.

    Tuesday: NFIB small business optimism survey for June.

    Wednesday: Consumer Price Index report and housing starts for June.

    Thursday: Producer Price Index report for June.

    Friday: University of Michigan consumer sentiment and inflation expectations for July.

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  • Expect more rate hikes from the Fed after the latest jobs report | CNN Business

    Expect more rate hikes from the Fed after the latest jobs report | CNN Business

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    Washington, DC
    CNN
     — 

    An interest rate hike later this month was already in the cards for the Federal Reserve. But after the June jobs report, the timing of a second hike remains unclear.

    Job gains remain robust, wage growth is still going strong, and unemployment continues to hover near historic lows. That means the job market is still fueling demand in the economy, which the Fed has been trying to slow through rate hikes. And Fed officials have made it clear they think the central bank still has more work to do to bring down inflation, which is still running well above the 2% goal.

    Federal Reserve Bank of Chicago President Austan Goolsbee, a voting member of the Fed committee that decides interest rates, said in an interview Friday that he sees “a decent chance of further tightening down the pipeline” and that inflation “needs to come down more.”

    Other Fed officials have struck a similarly hawkish tone on inflation, hinting strongly at a hike in July.

    “I remain very concerned about whether inflation will return to target in a sustainable and timely way,” said Federal Reserve Bank of Dallas President Lorie Logan on Thursday during a meeting hosted by the Central Bank Research Association. “I think more restrictive monetary policy will be needed to achieve the Federal Open Market Committee’s goals of stable prices and maximum employment.”

    Fed officials voted last month to hold the key federal funds rate steady at a range of 5-5.25% to reassess the economy after a string of 10 consecutive rate hikes and to monitor the effects of bank stresses in the spring, according to minutes from that meeting released Wednesday.

    “We can take some time and assess and collect more information and then be able to act, knowing that we also communicated through our projections that we don’t think we’re done, based on what we know,” said New York Fed President John Williams Wednesday during a moderated discussion in New York. “And obviously we’re absolutely committed to achieving our 2% inflation goal.”

    And Fed Chair Jerome Powell himself has doubled down on the need for more rate increases in recent speeches, not ruling out back-to-back hikes, despite economic indicators showing slight progress on inflation.

    Financial markets are pricing in a more than a 90% chance of a rate hike later this month, according to the CME FedWatch Tool.

    The Fed wants to see the labor market slow down broadly, bringing it into “better balance,” as Powell has frequently described it. That means wage growth would need to cool consistently, monthly payroll growth would need to be close to a range of 70,000 and 100,000 — the smallest job gain needed to keep up with population growth — and unemployment would need to rise, according to economists. Job market conditions don’t resemble that just yet.

    “This is clearly a very tight labor market, so I expect the Fed to look at this data and say there is justification here for continued small rate increases because the labor market is not cooling enough,” Dave Gilbertson, labor economist at payroll software company UKG, told CNN.

    Labor costs are higher because of a persistent difficulty in hiring, weighing on labor-intensive service providers such as hospitals and restaurants, which has put upward pressure on consumer prices since businesses typically raise wages to address hiring challenges.

    Powell homed in on that dynamic in recent remarks, and research from top economists argues the Fed will have to slow the economy further to fully address the labor market’s stubborn impact on inflation. Whether that means a full-blown recession or a so-called soft landing remains to be seen, but some Fed officials are optimistic.

    “I feel like we are on a golden path of avoiding recession,” Goolsbee told CNBC Friday.

    And there has been some progress on bringing the job market back into better balance while inflation has come down. Job openings fell to 9.82 million in May, down from a peak of 12 million in March 2022, though they still greatly exceed the number of unemployed people seeking work. And June’s jobs total of 209,000 is still robust by historical standards.

    But Gilbertson said labor shortages have been largely driven by demographic shifts, which might keep the job market tight for the foreseeable future.

    Beyond the expected hike in July, the Fed is going to remain laser-focused on wage growth to inform its decision-making later in the year. Central bank officials will pay particular attention to the Employment Cost Index, which recently showed that pay gains picked up in the first three months of the year. The index for the second quarter will be released in late July — after the Fed meets.

    “The focus is on the path of wage inflation because of its pass-through to services inflation,” said Sonia Meskin, head of US Macro at BNY Mellon IM.

    The June jobs report showed that average hourly earnings growth was unchanged at 0.4% from the month before and also unchanged at 4.4% year-over-year — not a welcome development.

    Core inflation hasn’t decelerated as fast as the headline measure because of the tightness in the labor market. The Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, rose 3.8% in May from a year earlier, down from April’s 4.3% rise; while the core measure edged lower to 4.6% from 4.7% during the same period.

    Within the core measure, services inflation also remains sticky and Powell said in last month’s post-meeting news conference that “we see only the earliest signs of disinflation there” and that the services sector’s “largest cost would be wage cost.”

    The Fed’s strategy to address services inflation is simply by curbing demand through more rate hikes. So, in addition to the labor market, the Fed is highly attentive to consumer spending, which has cooled in the past several months, according to figures from the Commerce Department.

    Other headwinds are expected to weigh on consumers in the months ahead, such as the resumption of student loan payments and the Supreme Court blocking President Joe Biden’s student loan forgiveness program. Americans are also running down their savings accounts while racking up debt, so US consumers may need to start cutting back soon.

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  • Some Fed officials pushed for June rate hike, minutes show

    Some Fed officials pushed for June rate hike, minutes show

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    There was support from an unspecified number of Federal Reserve officials for an interest rate hike at the central bank’s policy meeting in June, according to a summary of the discussions released Wednesday.

    “Some participants indicated that they favored raising the target range for the federal funds rate 25 basis points at this meeting or they could have supported such a proposal,” the minutes of the June 13-14 meeting said.

    These…

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  • Recession canceled? U.S. stock market ‘pretty frothy’ after S&P 500’s strongest first half since 2019.

    Recession canceled? U.S. stock market ‘pretty frothy’ after S&P 500’s strongest first half since 2019.

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    The S&P 500 index just wrapped up its strongest first half of a year since 2019, as a U.S. recession feared near by many investors seems perpetually further away than anticipated, leaving the stock market rally’s momentum for the rest of 2023 in question.

    It’s “difficult to gauge” when the “liquidity unleashed” by the U.S. government during the pandemic will run out, said José Torres, senior economist at Interactive Brokers, in a phone interview, referring to fiscal and monetary stimulus in 2020-2021. While the Federal Reserve has been raising interest rates since 2022 to battle high inflation, the Fed’s intervention after regional-bank failures in March provided more liquidity to the financial system, he said.

    That “created this environment for risk assets to run higher,” said Torres. And then, the artificial-intelligence craze has more recently driven “momentum” in U.S. stocks, he said. “I think the market goes lower from here.”

    The S&P 500
    SPX,
    +1.23%
    in mid-March was trading near its starting level in 2023, as regional-bank woes weighed on stocks before the Fed’s intervention that month. The central bank’s bank term funding program, announced March 12, helped shore up confidence in the banking system, taking off “a lot of pressure on financial conditions,” according to Torres. 

    The S&P 500 rose 15.9% in the first six months of 2023 for its strongest first-half of a year since 2019, according to Dow Jones Market Data. Each of the index’s 11 sectors climbed in June, marking the first time since November that all of them were up in the same month.

    The U.S. economy has been resilient despite the Fed’s rapid interest rate hikes in 2022 to cool demand and bring down still high inflation. Investors appear to be shrugging off recession worries after some surprisingly strong economic data in recent days.

    “Ladies and Gentleman, the recession has been cancelled!” wrote Bernard Baumohl, chief global economist at the Economic Outlook Group, in a note emailed June 29.  

    “Let’s not forget that despite the economy’s impressive performance the first three months, prices have continued to ease as well,” Baumohl said in the note. “Virtually every inflation metric has been falling,” he said, so “unless inflation shows signs of reversing course and accelerates, the Fed should maintain its current pause.”

    The Fed has slowed its interest-rate hikes this year, pausing them at its June policy meeting while signaling that further rate increases may still be coming. Federal-funds futures on Friday showed traders largely expecting the Fed to lift its benchmark rate by a quarter point in July to a targeted range of 5.25% to 5.5%, according to the CME FedWatch Tool, at last check. 

    Investors have cheered the Fed’s pause, with many expecting it’s near the end of its rate-hiking cycle, which had led to brutal losses for stocks and bonds last year. 

    Meanwhile, economic data released in the past week showed a revised estimate for U.S. growth in the first quarter was higher than anticipated; new orders for manufactured durable goods were stronger than expected in May; sales of newly built homes that same month beat economists’ forecasts; consumer confidence jumped in June to a 17-month high based on a Conference Board survey; and that initial jobless claims in the week ending June 24 fell.

    See also: U.S. economy on track to grow as fast as 2% in the second quarter

    Investors also welcomed more evidence of inflation easing. U.S. inflation measured by the personal-consumption-expenditures price index softened to 3.8% in May on a 12-month basis, the slowest increase since April 2021, based on a government report Friday. 

    But Torres said he worries the U.S. economy may be growing too fast for the Fed’s fight with inflation, potentially leading the central bank to become more hawkish by further tightening monetary policy. 

    ‘Shocked’

    “There’s a huge discrepancy” between two-year Treasury yields
    TMUBMUSD02Y,
    4.908%
    and where the Fed has indicated its benchmark rate may wind up at the end of its hiking cycle, he said. That’s after the recent rise in two-year yields from the wake of their fall during the regional-banking stress.

    The Fed’s summary of economic projections, released in June, showed its policy rate could wind up as high as 5.6% by the end of this year, compared to a current targeted range of 5% to 5.25%. 

    Meanwhile, the yield on the two-year Treasury note rose 81.7 basis points in the second quarter to 4.877% on Friday, the highest level since March 9 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data.

    “I’ve been shocked the market has already been able to digest this yield move to the upside,” said Torres. “There’s still more room to the upside on yields,” he said, adding that two-year Treasury rates often are viewed as a gauge of how hawkish the Fed may be with its policy rate.

    The U.S. stock market rose on Friday, closing out June with weekly, monthly and quarterly gains.

    The S&P 500 and Nasdaq Composite
    COMP,
    +1.45%
    each finished the month at its highest closing level since April 2022, with both indexes notching their longest monthly win streaks since 2021, according to Dow Jones Market Data. The technology-heavy Nasdaq soared 31.7% during the first six months of 2023, clinching its best first half since 1983.

    Sentiment in the stock market has gotten “pretty frothy,” making equities vulnerable to a decline, said Liz Ann Sonders, chief investment strategist at Charles Schwab, in a phone interview. “On the surface the market has been incredibly resilient, but of course the concentration has been extreme.” 

    She pointed to a “small handful” of megacap stocks, including names like Apple Inc.
    AAPL,
    +2.31%
    Microsoft Corp.
    MSFT,
    +1.64%
    and Nvidia Corp.
    NVDA,
    +3.63%    ,
    powering the performance of the S&P 500 and Nasdaq.

    Read: Apple clinches $3 trillion valuation, becoming first U.S. company to close at that mark

    Such stocks “really kicked into high gear” at the start of the banking trouble in March, as investors, in a defensive move, sought companies that are “highly liquid” and generate cash, she said.

    Stocks in that megacap group, sometimes referred to as Big Tech although they span sectors including communication services and consumer discretionary as well as information technology, have also benefited from AI exposure, said Sonders.

    Weakness, strength on the roll

    Sonders said she sees the U.S. as having experienced “rolling” recessions in different segments – such as housing or manufacturing – as opposed to the entire economy being swept up in a full-blown downturn. “The recession versus no recession debate” is missing the current nuances of this cycle, in her view.

    “We’ve seen weakness and strength rolling through the economy as opposed to everything either booming at the same time, or falling apart at the same time,” she said. So while cracks may turn up in the services sector, the U.S. could still benefit from other areas, such as the recent lift seen in the housing market, which already has gone through a recession, according to Sonders.

    Read: Homebuilder ETF outperforms S&P 500, industry’s stocks still ‘cheap’ in 2023 market rally

    In the stock market, megacap names have gotten a lot of attention for their surge this year, yet other pockets, such as homebuilders and the S&P 500’s industrials sector, have recently done well, she said. Industrial stocks
    SP500EW.20,
    +0.92%
    recently stood out to Sonders for their “decent breadth.”

    But to her thinking, “this is not the kind of environment to make a monolithic sector call or two,” rather Sonders favors screening stocks for characteristics such as “high quality” when looking for investment opportunities.

    Fluctuating financial conditions have made it harder to discern when the U.S. could fall into a recession, according to Torres. But rates rising further poses the risk of returning to the kind of environment that created stress for regional banks, he said. And with “commercial real estate lurking in the background” as a concern, he said it’s tough to see the stock market climbing from the S&P 500’s already “rich” levels.

    “The higher the Fed pushes rates, the more pressure that’s gonna put on bank balance sheets,” said Charlie Ripley, senior investment strategist for Allianz Investment Management, in a phone interview. “It just becomes a question of whether or not you’re going to see a run on a particular bank.”

    This coming week, the Fed will release minutes from its June policy meeting. Investors will see them on Wednesday, the day after the July 4 holiday in the U.S. 

    While the S&P 500 has rallied in 2023, shares of the SPDR S&P Regional Banking ETF
    KRE,
    -1.14%
    sank 30.5% in the first half of the year while the Invesco KBW Bank ETF
    KBWB,
    +0.24%
    is down 20.5% over the same period, according to FactSet data.

    “There is a lot of dispersion within the market,” said Ripley. “There are pockets that are doing better than others.”

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  • Riksbank Lifts Policy Rate to 3.75% From 3.50%, Signals More to Come

    Riksbank Lifts Policy Rate to 3.75% From 3.50%, Signals More to Come

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    By Dominic Chopping

    STOCKHOLM–Sweden’s central bank on Thursday lifted its key policy rate to 3.75% from 3.50%, as expected, and signaled a further hike later in the year as it continues to fight stubbornly high inflation.
    

    The Riksbank’s new rate path now implies the rate will peak at around 4.05% from around 3.65% previously, and remain at that level well into 2025.
    

    

    “For inflation to return to the target of 2% within a reasonable period of time, monetary policy needs to be tightened further,” the central bank said.
    

    “The forecast is for the policy rate to be increased at least one more time this year,” it said.
    

    The Riksbank said that new information, such as service prices rising unexpectedly fast and a weaker krona, indicates that inflation is declining more slowly than expected.
    

    Alongside Thursday’s rate decision, the central bank said it will expand government bond sales to 5 billion Swedish kronor ($463.6 million) a month from SEK3.5 billion from September, a move it said could contribute to a stronger krona and improve its capacity to reduce inflation.
    

    The Riksbank added that it is exploring ways to reduce currency risk by hedging part of its foreign exchange reserves. The starting point for this would be to hedge around 25% of its SEK410 billion reserves, it said.
    

    Write to Dominic Chopping at dominic.chopping@wsj.com
    

    

    

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    Turkey hikes interest rates to 15% as Erdogan reverses policy on fighting inflation | CNN Business
    
			
    Turkey hikes interest rates to 15% as Erdogan reverses policy on fighting inflation | CNN Business
    
			
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      London
    
      CNN
    
         — 
    
        

    

    
      Turkey’s central bank almost doubled interest rates to 15% Thursday in a dramatic reversal of its unorthodox policy of cutting the cost of borrowing to tame painfully high inflation.
  
    

    
      Annual consumer price inflation has come down from a two-decade high of 85.5% in October but was still 39.6% in May.
  
    

    
      The central bank said that there were indications that underlying inflation in Turkey was increasing, even as inflation in many other countries trends downwards.
  
    

    
      “The strong course of domestic demand, cost pressures and the stickiness of services inflation have been the main drivers,” the central bank said in a statement.
  
    

    
      This is the first rate decision by Turkey’s central bank since last month’s reelection of President Recep Tayyip Erdogan.
  
    

    
      It is also the first rate increase in more than two years, and the central bank’s first decision since the appointment earlier this month of new governor Hafize Gaye Erkan, a former Goldman Sachs banker and the first woman to hold the position.
  
    

    
      In its statement, the central bank said it hiked rates to bring down inflation “as soon as possible,” and that it would continue to do so gradually “until a significant improvement in the inflation outlook is achieved.”
  
    

    
      Liam Peach, senior emerging markets economist at Capital Economics, wrote in a Thursday note that there were  “encouraging signs” from the central bank that further rate hikes were ahead.
  
    

    
      The London-based research firm expects Turkish interest rates to rise as high as 30% later this year.
  
    

    
      Erdogan had ordered his central bank to cut rates nine times since late 2021, taking them to 8.5%, even as inflation around the world started to accelerate and most economies were doing the opposite. In that time, the value of the Turkish lira crashed 170% to a record low against the US dollar.
  
    

    
      A weaker lira has aggravated Turkey’s cost-of-living crisis by making foreign imports more expensive, and pushed the government to use up billions of its foreign currency reserves in an attempt to boost the currency’s value.
  
    

    
      Erdogan — who has fired four central bank governors in as many years — has since tried to reassure investors that he intends to normalize Turkish economic policy by filling key posts with more orthodox figures such as Erkan.
  
    

    
      This month, Erdogan also appointed Mehmet Simsek, Turkey’s former deputy prime minister and finance minister, and a former economist for US wealth management firm Merrill Lynch, as his finance minister.
  
    

    
      But the lira weakened further after Thursday’s rate hike news, dropping more than 2% to a new record low of 24 to the US dollar.
  
    

    
      Craig Erlam, senior market analyst at Oanda, noted that the rate hike had come in at the lower end of market forecasts, and investors couldn’t afford to relax too soon.
  
    

    
      “Erdogan hasn’t really hesitated to sack [central bank] governors that raise rates in the past, so investors will never feel fully at ease as long as he’s president,” he wrote in a note.
  
    

    

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    Norway’s central bank lifts interest rates 50 basis points, sees another hike in August
    
			
    Norway’s central bank lifts interest rates 50 basis points, sees another hike in August
    
			
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    Norway’s central bank on Thursday lifted interest rates by 50 basis points and said a further hike may be needed in the near term. 
    

    On a busy day for central banks, the Norges Bank boosted its policy rate to 3.75%. Markets had been divided between expectations for hikes of either 25 or 50 basis point hikes.
    

    

    “The Committee’s current assessment of the outlook and balance of risks implies that the policy rate will most likely be raised further in August,” Norges Bank said in a statement on its website.
    

    The Norwegian krone
    
        USDNOK,
    
        -1.28%
    
       climbed 1.3% to 10.25 krone against the dollar. 
    

    The central bank is hemmed in by sticky inflation, with core inflation climbing to 6.7% in May from 6.5% in April, defying expectations for a gain of just 6.3%, according to analysts polled by Bloomberg News. Indeed, the central bank said inflation is “markedly above the target,” with international interest rates rising more than anticipated, and higher wage growth and a weaker krone than projected previously set to drive up inflation.
    

    “If we do not raise the policy rate, prices and wages could continue to rise rapidly and inflation become entrenched. It may then become more costly to bring inflation down again,” said Governor Ida Wolden Bache.
    

    Norges Bank said the effects of past rate hikes are not evident, with the effects on household consumption from those and higher inflation also an unknown right now. Thursday’s hike marks the third this year for 100 basis points in total. 
    

    The Swiss National Bank also hiked interest rates on Thursday, with decisions from the Bank of England and Turkey’s central bank also ahead. 
    

    

    

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