Weekly Market Recap (12-16 June 2023)

MondayHaskell (The Falcon) of the Bank of England said further price increases cannot be ruled out. Mann (The Falcon) of the Bank of England highlighted that a wage increase above 4% will make it difficult to bring the CPI back to 2%.

Tuesday: The UK employment report outperformed across the board as the unemployment rate fell to 3.8% vs. 4.0% expected and previous negative employment figures were revised to reflect gains. The worst part for the Bank of England is the rate of wage growth. Average weekly earnings came in at 6.5% vs. 6.1% expected with the previous release revised upwards from 5.8% to 6.1%. Average weekly earnings excluding the bonus came in at 7.2% vs. 6.9% expected and the prior read was revised to 6.8% from 6.7%. BoE’s Mann explained just a day ago how a wage increase above 4% would make it difficult to return to the 2% inflation target, so the BoE has a lot of work to do here as high inflation becomes entrenched.

BoE’s Green said it was reasonable to expect inflation to decline fairly quickly but returning to the 2% target would be difficult. He does not like the idea of ​​stopping monetary policy because it could end up with a much higher interest rate and a worse recession. He also added that the MPC should act proactively on inflation dynamics (a little later than that).

The People’s Bank of China (PBOC) cut the 7-day reverse repo to 1.9% from 2.0% previously for the first time since August 2022 as policymakers worry about China’s recovery. Moreover, on the same day it cut the Standing Lending Facility (SLF) by 10 basis points.

US CPI missed expectations on the core gauge with the Y/Y figure coming in at 4.0% vs. 4.1% expected and M/M at 0.1% vs. 0.2% expected. The problem is that core CPI, which is what the market is probably focusing on right now, came in in line with expectations with Y/Y reading at 5.3% and M/M at 0.4%. Core inflation appears to be stuck at a higher level compared to the previous three decades.

Bank of England Governor Bailey (Al-Saqr) commented on the labor market data as “very tight”. Dhingra (Dove) of the Bank of England said inflation remains far too high compared to the 2% target, but urged patience saying the full effects of higher interest rates will take time to affect the economy. Dhingra (and Tenreyro) are the most pessimistic members of the MPC and voted to keep interest rates unchanged at the last meeting.

Wednesday: US PPI fell yoy to 1.1% vs. 1.5% expected, while PPI came in yoy at -0.3% vs. -0.1% expected. Core PPI fell yoy to 2.8% vs 2.9% expected, while yoy PPI came in at 0.2% vs 0.2% expected. We saw some dovish but contained reaction in the markets due to the FOMC risk a few hours later.

The Fed delivered expectations with a slightly optimistic surprise by keeping interest rates unchanged at 5.00-5.25% while adding 50 basis points to the final interest rate in the Dot Plot. The FOMC vote was unanimous. This seemed like a jaw-dropping move to avoid a pessimistic interpretation of their hiatus. Growth for 2023 was revised up to 1% from 0.4% in March, unemployment was revised down to 4.1% vs. 4.5% previously, and core personal consumption expenditures were revised down to 3.9% vs. 3.6% previously. Moreover, the Fed revised interest rates up by 30 basis points in 2024 and 2025. The Fed decided to pause as it “will allow the committee to assess additional information and its implications for monetary policy.” At the press conference, Fed Chairman Powell noted that the July meeting is “live”, but everything will depend on the set of data received.

ThursdayThe People’s Bank of China (PBOC) lowered the medium-term lending facility (MLF) rate by 10 basis points from 2.75% to 2.65%. A similar move is expected on the LPR rates next Tuesday.

The European Central Bank raised interest rates by 25 basis points, bringing the deposit rate to 3.5%, as was widely expected. The central bank also raised its inflation forecasts and lowered growth forecasts. Moreover, the ECB confirmed that it will stop reinvesting proceeds from the Asset Purchase Program (APP) from July to reduce its balance sheet by 25 billion per month. Chair Lagarde indicated that “another rally in July is possible” unless there is a “fundamental change” in economic data. Later in the day, as it usually does, the ECB Sources report said that the central bank will discuss raising rates in September in the summer.

US Jobless Claims again missed expectations at 262k vs 249k exp and the previous number was revised slightly higher to 262k from 261k. Continuing claims, which is an indicator of how difficult it will be to find work after losing their jobs, rose to 1775k vs. 1776k expected, up 20k from the previous revised reading of 1755k.

US retail sales in May rose 0.3% vs -0.1% expected, while the control group came in at 0.2% vs -0.2% expected. The y/y reading was 1.6% vs. the 2.2% expected and the prior reading, revised downwardly, of 1.2%. Note that these are nominal numbers, if we adjust for retail sales for Y/Y inflation were negative for 7^y consecutive month, the longest streak since 2009.

FridayThe Bank of Japan kept everything unchanged as widely expected with the interest rate at -0.10%, the 10-year JGB yield target around 0% and the tolerance range at +/-0.5%. The central bank said the economy is picking up but expects core consumer inflation to slow in the middle of the current fiscal year (around September/October). Later in the day, Bank of Japan Governor Ueda said that they have not changed their policy because inflation in Japan is not sustainable, and more time is needed to achieve the 2% inflation target. He also added that the negative effects of higher US interest rates may appear later, including the possibility of an economic downturn.

Below is a list of comments from ECB members this morning. TL; The DR is that they are not yet at the peak in prices and they will go up by 25 basis points in July, while the hike in September will depend on the data.

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The son of the European Central Bank (the Falcon)

• There is still a long way to go from being “clear” on inflation.
• Core inflation is proving stubbornly high.
• There is still a long way to go to reach the inflation target.
• We may need to maintain our hiking rates after the summer holidays.

Vasily ECB (Falcon)

• We’ll need to continue to gradually tighten.
• I think there is an additional 25 basis points increase before the summer break (July).
• The decision on whether to raise interest rates after the summer depends on the data.

Smkus of the European Central Bank (the Falcon)

• It is too early to say what the ECB will do in September.
• We are nearing the end of the tightening cycle.
• We need to raise interest rates in July.
• I do not see price cuts at the beginning of next year.

ren of the european central bank (hook)

• GC will continue to take a data-driven approach.
• We will ensure that key ECB interest rates are raised to sufficiently restrained levels to achieve a timely return of inflation to the 2% target.
• Prices will be raised in July at least.

Mueller (The Falcon) of the European Central Bank

• ECB rates have not peaked yet.
• Inflation is still very fast.
• What happens after July is pure speculation.

Holzmann of the European Central Bank (The Falcon)

• What happens after summer depends on the data.

Centeno of the European Central Bank (pigeon)

• Interest rates are in a restricted area and should stay there for some time after the summer.
• The vast majority, if not all, of the inflationary shocks have now almost reversed.
• The repercussions of the shocks will eventually reach final consumer prices. If this does not happen, there is a risk that interest rates will rise again.

ECB desire (hawk)

• We need to see a sustained decline in core inflation.
• It could rise again in September unless there is a significant drop in core inflation.
• Maintaining core inflation around 5% could necessitate a rate hike in September and possibly beyond.
• We have not yet seen the beginning of a slowdown in core inflation.

Villeroy from the European Central Bank (The Falcon)

• No one should rush to a premature conclusion about our calendar nor about the final interest rate.
• We rely on data.
• Monetary policy is working, and inflation has peaked.
• I am confident that the ECB will achieve its inflation target within two years.
• The ECB has covered most of the ground on rates.
• Duration of high interest rates matters more than level and persistence more than peak.

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The Fed’s Waller (Al-Hawk) said that financial stability is necessary for the Fed to fulfill its mandates, but that monetary policy should not be altered due to ineffective management at a few banks. Monetary policy and financial stability instruments are separate and distinct. He also added that the US economy is still in tatters and policy delays are not what they used to be due to reliance on forward guidance. He continued to complain that core inflation was not falling as he thought it would and that it was annoying that it was not moving, concluding that further tightening might be required.

The Fed’s Barkin (a hawk, a non-voter) said the pandemic may have strengthened the resilience of the labor market and that inflation remains very high and stubbornly persistent. He added that slowing the pace of the spikes gives more time to assess the data and that he would be comfortable doing more if the data required it. He went on to say that higher rates may create the risk of a more significant slowdown, but the experience of the 1970s shows that the Fed should not back down from fighting inflation too soon.

The University of Michigan Consumer Sentiment came in at 63.9 vs. 60.0 expected and 59.2 previously. The current conditions index came at 68.0 compared to the expected 65.1 and the previous 64.9, while the expectations index came at 61.3 compared to the expected 55.2 and the previous 55.4. The 1-year inflation forecast eased to 3.3% versus 4.1% forecast and 4.2% prior, while the 5-10-year inflation forecast was at 3.0% versus 3.0% forecast and 3.1% prior. In general, the Goldilocks report.

Next week will be quieter on the data front:

• The United States is off on Monday the Juneteenth.
• The People’s Bank of China (PBOC) is expected to cut the LPR on Tuesday.
• The UK CPI will be released on Wednesday.
• On Thursday we will have the SNB and BoE rate decisions, the US Unemployment Claims report and Fed Chair Powell’s testimony.
• Finally, on Friday we will see the S&P Global PMIs.

That’s it guys, have a great weekend!