The May CPI report was as bad as it could be. Don’t stop at food and energy, inflation is now everywhere.

Inflation Hits New Forty-Year High on Broad Price Gains U.S. consumer inflation reached 8.6% in May as surging energy and food costs pushed prices higher, with little indication of when the upward trend could ease.

May’s increase was driven in part by sharp rises in the prices for energy, which rose 34.6% from a year earlier, and groceries, which jumped 11.9% on the year, the biggest increase since 1979. (…)

Prices for used cars and trucks—a key engine of the past year’s inflation surge—rose 1.8% in May from April, reversing three months of declines. Shelter costs, an indicator of broad inflation pressures, accelerated on a monthly basis in May and were up 5.5%, compared with a year ago.

Airline fares rose 12.6% on the month, the third straight double-digit rise. (…)

“The breadth of inflation pressures in the economy should alarm the Fed,” he said.

On a monthly basis, the CPI jumped a seasonally adjusted 1% in May after rising 0.3% in the prior month. The so-called core-price index, which excludes the often volatile categories of food and energy, increased 0.6% on the month, the same as in April. That compares with an average monthly gain of 0.2% for both measures in the two years before the pandemic. (…)

Food price increases are unusually broad, and every single grocery category measured in the report rose in May from a year ago—most of them by double digits. (…)

The breadth and persistence of these supply problems means that for inflation to ease, demand must come down, said Mr. Knightley of ING. “To get demand into better balance with the supply the onus is on the Federal Reserve to do the heavy lifting,” he said.

Here, there and everywhere:

• Food-at-Home: +11.9% YoY in May; YtD: +15.1% a.r..
• Energy:               +34.6% YoY in May; YtD: +38.9% a.r.
• Core CPI:            +6.0% YoY in May;   YtD: +6.2% a.r.
• Core Goods:      +8.5% YoY in May;   YtD: +4.6% a.r.
• Core Services:   +5.2% YoY in May;   YtD: +6.7% a.r.
• Shelter:              +5.5% YoY in May;   YtD: +5.8% a.r. (last 3 months: +6.6% a.r.)

Taking most essentials out: “All items less food, shelter, and energy”: +6.4% YoY; +7.3% a.r. in the last 2 months

Core Goods ex-vehicles: +7.2% YoY; +4.2% a.r. in the last 2 months

Services less rent of shelter: +6.0% YoY; +12.1% a.r. in the last 2 months.

Medical Care: +3.7% YoY; +4.9% a.r. in the last 2months.

The Atlanta Fed’s sticky-price consumer price index —a weighted basket of items that change price relatively slowly—increased 7.5% a.r. in May, following a 7.1% increase in April. On a YoY basis, the series is up 5.2%. The flexible cut of the CPI—a weighted basket of items that change price relatively frequently—increased 27.9% a.r. in May and is up 18.5% YoY.

• On a core basis (excluding food and energy), the sticky-price index increased 7.3% a.r. in May, and its 12-month percent change was 5.0%. Three-month a.r.: +6.8%.

• Inflation May Soon Ease, but Not Enough Excess inventories at retailers might soon act against inflation, but it remains far too high for the Federal Reserve to ease off tightening

(…) The heady demand that the pandemic set off for goods, in combination with supply-chain snarls and the wherewithal to spend provided by government relief programs, are a big part of why inflation has been running so hot. (…)

So after nearly two years of watching prices on household goods go nowhere but up, consumers might be about to see some of them come down.

That could put a dent in the inflation figures. For example, according to the Labor Department, May’s 9.7% increase in prices from a year earlier for household furnishings and supplies—a category that includes appliances and furniture—accounted for about a half percentage point of the gain in core prices.

(…) new- and used-vehicle prices rose 13.7% from a year earlier in May, and contributed about 1.4 percentage points to the gain in core prices. (…)

It is reasonable to expect retailers’ inventory woes to contribute to an easing in inflation in the months ahead. But the Fed is likely to view that as an isolated phenomenon. Absent signs of cooling elsewhere, it is less reasonable to expect the Fed to slow its pace of rate increases.

Still this fixation on goods. For the record, again,

• core goods account for 21.4% of the CPI basket, contributing 1.8% to the 6.0% increase in core prices in the last year
• core goods ex-vehicles, new and used: 17.4%, contributing 1.2% to the 6.0% increase in core prices in the last year
• household furnishings and supplies: 4.0%, contributing 0.4% to the 6.0% increase in core prices in the last year
• new- and used-vehicles: 9.1%, contributing 1.2% to the 6.0% increase in core prices in the last year

Yes, goods inflation will eventually ease, even deflate as rising supply overcomes waning/falling demand. Were core goods prices to immediately return to their February 2020 level, their 12.6% decline would reduce CPI by 2.7% to 3.3% from its current 6.0% level, ceteris paribus.

But ceteris non paribus. Perhaps we will get great crops (during La Nina?) and food prices will ease, and perhaps oil prices will stabilize unlike what most “experts” predict. Let’s hope.

But the biggest problem is services (60.3% of the CPI) and the close link between services prices and wages. Service providers’ two most important cost items are labor (sticky) and energy (flexible but geopolitical).

Wages were up 5.0% YoY in Q1’22 per the Employment Cost Index. But the Atlanta Fed median wage tracker was up 6.1% during the 3 months ended in May (+6.5% for May alone). Wages in services are also up 6.0% in May. And, so far, there has been no offset from measured productivity, down 1.8% annualized in the last 3 quarters.

The inflation squeeze is pushing many workers to seek better income and the low unemployment rate gives them the upper hand. Wages for job switchers were up 7.5% YoY in May and companies must adjust pay for their loyal employees accordingly.

The FOMC is very clear: it wants to avoid a wage/price spiral and must therefore curb demand for labor and increase labor availability.

But the unemployment rate never really increases outside of recessions:

And reducing the number of employed persons always requires a recession. The occasional soft landings don’t do the job.

Jay Powell knows this, having already invoked Paul Volcker (there’s never been a Volcker put), but he made sure we know what’s really at stake in a May 12 interview:

“The process of getting inflation down to 2 percent will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched,” Mr. Powell said, speaking during an interview with Marketplace on Thursday. (…)

“If things come in better than we expect, then we’re prepared to do less,” Mr. Powell said. “If they come in worse than when we expect, then we’re prepared to do more.”

Well, the May CPI certainly came in much worse than expected. In the same interview, Mr. Powell said:

“There are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so,” Mr. Powell said on Thursday. “So the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.”

Indeed, uncontrolled factors are quickly doing part of the dirty job for the Fed:

This next chart plots the YoY change in inflation on life’s essentials (food, energy and rent, weighted), now +9.4%, the highest since 1980. As mentioned above, CPI less food, shelter, and energy is up 6.4% YoY, and +7.3% a.r. in the last 2 months. The squeeze is total:

Deflating hourly wages with CPI-Essentials shows the rude shock currently absorbed by the average American. Wages were up 5.7% in May but were actually down 3.7% after inflation on essentials. Excluding the pandemic, previous periods with similar shocks forced consumers to drastically cut discretionary expenditures, particularly durable goods.

Real durables are down 7.1% YoY in May but that is against the high pandemic base. In reality, durables consumption is still 25% above its pre-pandemic level while real wages (per the ECI) are down more than 6% and falling.

There is no real demand left for durable goods other than vehicles. But prices of vehicles have skyrocketed 50.6% above their pre-pandemic levels while interest rates are rising rapidly. Prices will surely retreat, but how quickly and how much demand will there be left given higher financing costs amid falling real wages?

Actually, the Fed’s crusade to reduce demand for goods could be fulfilled beyond its dreams. Core goods inflation will surely decline, in fact probably deflate given current high inventories, but unless food, energy and rent costs, not directly impacted by domestic macro trends, abate, the income squeeze will endure.

The May CPI report, and the bond market reaction, will embolden the hawks to demand an even more restrictive monetary policies, right when the fiscal side is hurting, and when retail sales and the housing market, the entire consumer sector for that matter, are entering a very difficult period.

We can hope that “revenge spending” on travel and entertainment will more than offset waning goods consumption. But how revengeful can one really afford to be when airfares, resorts, concerts and restaurants cost 20-35% more than in 2019?

Mr. Powell will finally be right on something: it will be painful. But it may get more painful than needed if the hawks gain the upper hand right when the consumer is priced out and already retrenching.

Recall that Amazon grew its North American sales 8% in its Q1 ended in March. Target and Walmart both said that sales got weaker in March and really soft in April. They reported same store sales growth of 3.3% and 3.0% respectively for their quarter ended in April. CPI core goods-ex-vehicles is up 7.2% YoY.

Never mind black swans, black hawks are the bigger threat.

• “The inflation data are unlikely to show a “clear and convincing” deceleration until December. The FOMC is likely to respond to the firmer inflation print and the rise in long-term inflation expectations with a resolutely hawkish message at the June meeting, in addition to the 50bp rate hike it is set to deliver. This should come across clearly in the statement, the economic projections, and the dots. We expect the FOMC to revise the policy guidance in its statement to say that the Committee “anticipates that raising the target range expeditiously will be appropriate until it sees clear and convincing evidence that inflation is moderating.” (Goldman Sachs)
• Fed Task Gets Tougher, Putting 75-Basis-Point Hike Back in View
• Larry Summers Says Fed Forecasts Look Ridiculous, Warns on Rate Delay

(…) “It’s pretty clear that peak-inflation theory, like ‘transitory’ theory is kind of wrong,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “The Fed’s forecasts from March, saying that inflation would be coming down to the 2s by the end of the year was, frankly, delusional when issued, and looks even more ridiculous today.” (…)

“The debate has been between 25 and 50 basis point moves a couple months from now,” Summers said. “I think a more fruitful deliberation would be between 50 and 75 basis points.” (…)

• What if Gasoline in the U.S. Goes to $6? $7? (Moody’s)

(…) Wholesale gasoline prices point toward an increase in average U.S. gasoline prices from $5 to $5.50 over the next couple of weeks. Critical to the forecast for growth and inflation is that energy prices, including gasoline, are near their peaks and will steadily decline through the rest of this year and into next.

What if we’re wrong? (…)

In the first scenario, U.S. prices at the pump average $6 per gallon in the latter half of 2022. In the second scenario, prices surge to $7 per gallon. In both scenarios, gasoline prices quickly return to our baseline forecast by mid-2023. A general rule of thumb is that a $10 increase in the price of a barrel of oil results in a $0.25 increase in the price of a gallon of gasoline.

Further, every penny change in retail gas prices adds or subtracts $1.28 billion in consumer spending over the course of a year. Therefore, the economic costs of higher gasoline prices increase quickly and are likely nonlinear. Gasoline prices at $6 or $7 would be psychological thresholds and would likely weigh heavily on consumer sentiment and potentially increase the economic costs of higher prices at the pump.

Gasoline prices at $6 per gallon shave 0.4 percentage point off U.S. GDP growth in the third quarter, dragging output from the annualized growth rate of 3.6% in our baseline to 3.2%. In the final quarter, the hit to GDP growth is 1.2 percentage points. The decline is a function of a reduction in real consumer spending.

U.S. consumer prices, which we forecast to moderate steadily after peaking in the first half of 2022, instead accelerate to an average of 8.3% in the third, more than a percentage point higher than our baseline. In the fourth quarter, prices rise 7.3%, 1.4 percentage points hotter than our forecast of a 5.9% increase. (…)

At $7 per gallon, GDP growth in the U.S. slumps to 3.1% in the third quarter and 1.1% in the fourth. This marks a half percentage point and 1.6-percentage point reduction from our baseline, respectively. The inflationary impacts of $7 gas are similarly pronounced. The CPI jumps 8.6% in the third quarter and 7.7% in the fourth.

• Inflation Will Crank Up Your Air-Conditioner Bill This Summer All those boxes indicate record-high Sunday forecasts. Texas electricity use soared to an all-time high yesterday, breaking a record set in Aug. 2019. (Bloomberg)

Photo: Weatherbell.com (via Axios)

We could well be about to witness the mother of all perfect storms for consumers: broad inflation, spiking interest rates, layoffs and continued pressures on food and energy prices even as the economy weakens.

Can the one percenters, or even the top 20-percenters, save the day for everybody else, given their wealth and high excess savings? They also eat, drive and borrow. They also own a lot of financial assets which are not performing too well in this environment.

Perhaps a different kind of squeeze, but a squeeze nonetheless: an unwelcome bear hug after having splurged on houses and other stuff at inflated prices!

BTW:

Luxury U.S. Housing Market Is Cooling Economic uncertainty fueled by rising interest rates, volatile stocks and frothy prices is leading to a luxury slowdown, with a housing bubble in Austin near bursting.

(…) The number of luxury homes—defined as the top 5% of the market—that sold during a three-month period from Feb. 1 to April 30, 2022, dropped 18% compared with the number of sales during the same period in 2021, according to a new report from the real-estate brokerage Redfin. (…)

Prices are still holding, but they are unlikely to keep reaching new heights as buyers retreat, according to Sheharyar Bokhari, a Redfin senior economist. (…)

Richard Steinberg, a luxury real-estate agent at Compass, said he has been having “the price-reduction conversation“ with clients on at least 50% of his exclusive listings. Without offers or the promise of deals, many of them will have no choice but to listen, he said.

Mr. Steinberg said he sees the greatest reduction in activity on properties priced between $2 million and $5 million, a price range in which he says buyers typically rely on mortgage financing and are dealing with increased interest rates. Above $5 million, buyers are less concerned about interest rates, but they are expecting that the shifts in the financial markets will result in bargains on the real-estate front. (…)

• US inflation is now middle of the pack, 48th of 111 countries covering the most up-to-date data available

Source: Jim Reid, Deutsche Bank (via https://ritholtz.com/)

U.K. Economy Shrinks for Second Month as Outlook Dims The economy contracted again in April, as surging inflation weakened consumer spending, and programs designed to contain the spread of Covid-19 were wound down.

• Bank of England set to raise rates again as inflation heads for 10%

Jobless Rate Hits New Record Low in Canada, Wages Accelerate

The economy added 39,800 jobs in May, Statistics Canada reported Friday, surpassing the 27,500 gain anticipated by economists. The nation’s jobless rate fell to 5.1%, from 5.2%, bringing it to the lowest in data going back to 1976.

Masking the overall gain in net new jobs was a massive shift of part-time employment to full-time — another sign of a tight labor market. Full-time employment jumped by 135,400, with part-time jobs down 95,800.

The average hourly wage rate was up 3.9% from a year ago, an acceleration from 3.3% in April. (…) Wage gains for permanent workers hit 4.5%, up from 3.4% in April. (…)

The bulk of the new job gains came from the unemployment ranks, with the labor force growing by just 11,800 during the month. (…)

Canada’s economy has added more than 1 million jobs over the past year, with employment nearly half a million [+2.6%] above February 2020 levels. [USA: -0.5%]

The unemployment rate, based on U.S. methodology, was 4.1% in Canada in May, versus 3.6% south of the border.

Note that employment in goods manufacturing declined 43k in May, in spite of very positive PMI surveys.

• Big hit in store for Canadian tech sector as wave of layoffs looms, industry players say

A wave of layoffs and hiring freezes in the American tech sector is set to hit Canada hard, industry watchers say. They warn that although job cuts have already happened here, bigger reductions lay ahead.

“The message everyone is receiving is: ‘Protect your capital.’ There will be many more layoffs, no question,” said Jacques Bernier, managing partner with Montreal “fund-of-funds” firm Teralys Capital.

“It’s going to be a bloodbath,” said billionaire Vancouver investor and entrepreneur Markus Frind, who owns a majority of online furniture seller Cymax Group Inc. and backs several venture capital firms, all of whom are telling their companies to review their spending plans. “It’s going to be way worse than 2008,″ when the credit crisis sparked a recession. (…)

Valuation Trauma Is Refusing to End for S&P 500 in Free Fall

(…) Beyond just the real-time upheaval, one of the more tangible consequences of the central bank’s campaign has been to make fixed-income investments increasingly more attractive versus equities. One measure, a version of what’s known as the Fed model in which the S&P 500’s valuation is plotted against that of investment-grade bonds, is flashing ever-more worrisome signals for stocks.

Relative to its price, the S&P 500 “pays out” just under 5% in earnings as of Thursday, data compiled by Bloomberg show, versus the 4.4% average yield on investment-grade corporate bonds. The 0.54 percentage-point difference is close to the slimmest advantage that equities have held over credit since 2010.

Juxtapositions like that are making it hard to dive back into riskier assets as investors size up which ones will bear the brunt of a hawkish central bank bent on cooling growth.

“In a downturn, earnings will be hit, which will impact equities directly, even if multiples don’t change, while the vast majority of investment-grade companies have plenty of room to avoid credit-rating downgrades,” said Peter Tchir, head of macro strategy at Academy Securities. “The corporate bond yield versus the S&P 500 dividend yield seems attractive to me outright, let alone when I’m worried about the economy.” (…)

“There’s more room to drop for equities as stock investors are still in the denial stage about the Powell Put being gone and inflation being both a demand and supply shock,” Gokhman said. “Conversely, bond investors are wavering between the depression and acceptance stages. Sad as that sounds, it’s a better place to be.” (…)

The valuation correction has not run its course yet. At today’s pre-opening of 3800, the Rule of 20 P/E is 23.7, still 15% overvalued. This chart only uses actual data, no forecast.

Some may want to use the conventional P/E and find comfort at 16.1x forward EPS.

It is only 6.8% above its median but

1. that does not account for rising inflation and
2. it uses current forward earnings, 9.5% above trailing EPS and far from assuming any recession risk.

Earnings pre-announcements remain negative as we approach the end of Q2. More companies have pre-announced so far in Q2 than at the same time in Q1. Factset comments:

More S&P 500 companies have issued negative EPS guidance for Q2 2022 compared to recent quarters as well. At this point in time, 102 companies in the index have issued EPS guidance for Q2 2022, Of these 102 companies, 71 have issued negative EPS guidance and 31 have issued positive EPS guidance. This is the highest number of S&P 500 companies issuing negative EPS guidance for a quarter since Q4 2019 (73). The percentage of companies issuing negative EPS guidance for Q2 2022 is 70%, which is above the 5-year average of 60% and above the 10-year average of 67%.

The highest negative ratios are in Consumer Discretionary (83%- soft sales, lower margins) and Industrials (77%-often-cited strong USD).

Analysts are reacting, mainly on S&P 500 companies…

…but remain hopeful that all is good with EPS growth in Q2 (5.4% vs 6.8% on April 1), in Q3 (11.1% vs 10.6%) and in Q4 (10.9% vs 10.4%), continuing into 2023 (9.6% vs 9.8%).

They have never gone through inflation…

Meanwhile, other “investors” are having another difficult lesson:

Bitcoin Falls to Late-2020 Levels Amid Crypto Selloff This year’s rout in bitcoin deepened, with the world’s biggest cryptocurrency dropping amid a broader selloff fanned by concerns about rising U.S. interest rates.

• Crypto Lender Celsius Freezes All Account Withdrawals

Almost Daily Grant’s remembers that (my emphasis)

Last fall, Celsius raised $750 million in an upsized series B fundraising round, valuing the company at $3.5 billion. Duly emboldened, CEO Alex Mashinsky told Cointelegraph that he expected his company’s valuation to “double or triple” from that figure within the following 12 months. Underpinning that confidence, a relationship with an infamous crypto cornerstone: As Mashinsky informed Bloomberg last fall, Tether, the progenitor of so-called stablecoins under the same name, loaned $1 billion to Celsius at an interest rate of roughly 5% to 6%.

• Ether Price Chart Shows More Pain May Be Ahead for Token

Stinky, stinky…

Other than that:

• Inflation Cuts Online Fashion Down to Size Pure e-commerce retailers may have better growth prospects, but costs are rising faster for home delivery than for physical stores.
• Without Cheap Russian Energy, Some European Factories Must Close Industrial energy costs are soaring in the wake of Russia’s war on Ukraine, hobbling European manufacturers’ ability to compete in the global marketplace.
• Mexico Takes Aim at Private Companies, Threatening Decades of Economic Growth Populist President Andrés Manuel López Obrador is seeking to reclaim state control over the oil-and-gas and electricity sectors. “It’s a closing off of Mexico.”

WHAT A WONDERFUL WORLD!

• China Warns of Risk of War Over Taiwan While Pledging Peace
• China vows to ‘crush’ any attempt by Taiwan to pursue independence
• U.S. Defense Secretary Warns That China’s Military Is Increasingly Aggressive Lloyd Austin says Chinese aircraft and ships are engaging in provocative behavior in the Indo-Pacific region.
• US pledges to maintain military capacity to defend Taiwan Lloyd Austin warns China against ‘provocative’ activity at Asian defence forum

CPI for all items rises 1.0% in May; shelter, gasoline, food indexes rise In May, the Consumer Price Index for All Urban Consumers rose 1.0 percent, seasonally adjusted, and rose 8.6 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.6 percent in May (SA); up 6.0 percent over the year (NSA).

• Real average hourly earnings for all employees decrease 0.6% in May

FIVE BUCKS!

The spike gas prices in March-July 2008 totally broke the consumer for over one year.

That would be really untimely:

FYI, retail inventories were up 5.0% in mid-2000 and +2.5% YoY in March 2008. They are now up 17.2%. Imagine a consumer strike during an inventory liquidation period by over-staffed merchants!

U.S. Jobless Claims Rise Above Prepandemic Average Workers filed 229,000 jobless claims last week, the largest total since January, adding to signs the labor market could be cooling a bit.

Initial jobless claims, a proxy for layoffs, increased by 27,000 to 229,000 last week from the previous week’s revised level of 202,000, the Labor Department said Thursday. Claims had been at or below the 2019 average of 218,000 since late January.

The four-week average of new claims, which smooths volatility in the weekly figures, also rose slightly to 215,000 last week. That figure hasn’t decreased since early April.

Continuing claims, a proxy for the total number of people receiving payments from state unemployment programs, remained at 1.3 million in the week ended May 28—the lowest point since December 1969. Continuing claims are reported with a one-week lag.

Recent claims increases can be attributed to seasonal factors being thrown off balance because of the Covid-19 pandemic, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note. Memorial Day also fell on Monday last week, shortening the number of workdays. Claims figures can be more volatile around holidays. (…)

(Bespoke)

• The Great Resignation has seen workers of all stripes leave their jobs. But millennials are proving particularly flighty. About two-thirds of bosses say that generation has the highest turnover in their companies, according to a survey of 72 execs whose firms employ about 400,000 staff by WorkJam. By comparison, just 4% said Gen X, who’re in their 40s and 50s, are the biggest quitters.

China’s Inflationary Pressures Stay Muted Inflation remained benign in China as Covid-19 lockdowns hammered domestic demand, leading economists to forecast that policy makers may ramp up stimulus to boost economic growth and employment.

Consumer inflation continued low in May, the National Bureau of Statistics reported Friday, with prices up 2.1% from a year earlier, matching April’s rate. (…)

The producer-price index, which gauges factory-gate prices, was up 6.4%, easing from April’s 8%, as commodity rallies tamed. (…)

While the war in Ukraine has pushed global grain and energy prices higher, weak consumer spending on travel and entertainment helped keep China’s consumer inflation steady, an official with the NBS said. A cooling rally in commodities such as coal and nonferrous metals helped pull back factory-gate inflation, which last October was running at the fastest pace in 26 years. (…)

The WSJ did not bother to tell us the key core figure but Bloomberg has it:

Core inflation, which removes the more volatile food and energy prices, rose 0.9%, unchanged from April.

ECB Plans July Rate Increase as Inflation Problem Deepens The European Central Bank laid out plans to increase rates for the first time in more than a decade, joining many of its peers in raising borrowing costs to tackle persistent inflation that is spreading far beyond the U.S.

The ECB’s policy shift, about a year after eurozone inflation rose above its 2% target, would help to narrow the gap with the Federal Reserve, which has increased interest rates twice since March to a range between 0.75% and 1%. (…)

But unlike the Fed, the ECB needs to worry as it raises rates about how higher borrowing costs will pressure fragile and highly indebted southern European economies like Italy and Spain, whose sovereign debt sold off after the ECB’s rates decision.

The ECB said in a statement that it intends to raise its key rate by a quarter percentage point at its next policy meeting in July to minus 0.25%, and increase it again in September, possibly by a larger amount. The bank will also end its large-scale bond-buying program on July 1. After September, the ECB said it expects a series of further gradual rate increases. (…)

“It’s not just a step, it’s a journey,” [Lagarde] added. (…)

Under the ECB’s plans, the bank’s key rate would rise to zero or higher after its Sept. 8 policy meeting, exiting negative territory for the first time in eight years.

As part of its balancing act aimed at partly shielding fragile economies from rising borrowing costs, the ECB is expected to hold on to all of its mammoth portfolio of sovereign debt, unlike the Fed. The ECB’s balance sheet has almost doubled to about €8.8 trillion, equivalent to $9.39 trillion, since the start of the pandemic, swollen by large-scale bond purchases and cheap loans to households and companies.

Ms. Lagarde said the ECB would act to avoid “fragmentation” of its monetary policy—a code word that indicates the bank is ready to buy the debt of fragile eurozone governments like Italy’s, if needed, to avoid what it considers an undue increase in market rates.

Investors were unimpressed by the lack of details about a possible new bond-buying tool, dumping southern European debt. The yield on the benchmark 10-year Italian bond rose to 3.628%, the highest level since 2018, and the equivalent German bund yield rose to the highest level since 2014 at 1.461%, before both eased down moderately.

(…) Ms. Lagarde warned that inflation had spread to three-quarters of the items that the ECB tracks, and would remain elevated for some time. (…)

Ms. Lagarde pointed to a pickup in eurozone wages and a rapid recovery in sectors such as hospitality and tourism, which is fueling price increases. While Europe’s inflation problem “is largely, and certainly much more so than in the U.S., for instance…imported inflation” rather than a sign of overheating demand, inflation is also spreading more broadly, she said. (…)

• For most G10 central banks 50bp is the new normal for now

(…) It’s not only the Fed and the ECB that see 50bp as the new normal for now among G10 central banks. The Reserve Bank of Australia hiked its key rate this week by 50bp to 0.85% – and markets see a similar move at its next meeting in July. The Bank of Canada has hiked twice by 50bp and is expected to hold the same course until year-end. New Zealand has also already hiked twice by 50bp and is expected to hold that course until year-end at which point the key rate should rise to around 4% and be the highest among G10 currencies – see chart 1. The one major central bank that won’t hike rates in the foreseeable future is the Bank of Japan. (…)

Most G10 central banks are in a rush to hike rates – OIS pricing ahead

Looking until year-end, we see a lower EUR/USD since we expect the Fed to out-hawk the ECB. Moreover, the economic risks are highly tilted downwards in the energy importing Euro area, which could cast doubts on the ECB’s ability to hike interest rates as much as markets expect now. Meanwhile, the outlook for the energy-exporting US economy remains solid.

The energy-rationing theme in Europe is barely starting to get traction among rates and FX markets. Markets are still not pricing in this risk, likely because of better gas inventories in Europe compared to last year. Yet, there is little that could help Europe if Russia decides to materially cut the gas over the upcoming winter. Except perhaps a really mild winter, which would reduce the need for heating, but the latest meteorological models suggest that we won’t be that lucky with La Niña predicted to continue this winter.

We see this and continued volatility in financial markets materialising in a stronger USD ahead. That said, the primary risk to our view is that risk sentiment improves and/or if the energy crisis view does not materialize in Europe. (…)

CIBC Ramps Up Canada Banks’ Hunt for Staff With Wage Pledge

The lender’s minimum wage will rise to C$20 per hour in Canada and $20 in the US in July, and the bank is committing to raise those figures to C$25 and $25 by the end of 2025, according to a statement from Chief Executive Officer Victor Dodig on Thursday. The bank is also providing a 3% raise for workers in the six lowest levels of its pay scale next month. (…)

The bank’s minimum entry wage for merit-based pay team members is currently C$17. (…)

Royal Bank of Canada said last month that it would spend more than C$200 million on pay increases, benefits and other incentives to retain workers. The bank is raising base salaries by 3% in the four lowest levels of its pay scale, accounting for almost half of its workforce.

Bank of Nova Scotia is raising pay for workers in assistant manager roles and below, representing half of its Canadian employees, by 3% as of June 20. The increase, announced to employees last month, is in addition to regular year-end salary adjustments.

Bank of Montreal in October said it was raising its minimum wage for US branch and contact-center employees to $18 an hour, a 20% bump. (…)

Bank of Canada Sees Housing-Market Slowdown as ‘Healthy’

Macklem, speaking Thursday after the release of the central bank’s annual report on financial stability, argued home-price gains during the pandemic were unsustainable and produced vulnerabilities among new buyers who were forced to take on extremely high levels of debt.

“The economy can handle — indeed needs — higher interest rates,” Macklem said in an opening statement to reporters. “Moderation in housing would be healthy.” (…)

Canadians who purchased homes recently would be “more exposed” in the event of a correction, according to the 57-page report. Many households stretched themselves financially to get into the housing market, which saw price gains of nearly 50% since the beginning of the pandemic.

“If the economy slowed sharply and unemployment rose considerably, the combination of more highly indebted Canadians and high house prices could amplify the downturn,” Macklem told reporters, adding it could have “broad” implications for the economy and financial system. (…)

The central bank estimated the share of new mortgages this year going to highly indebted households — those carrying loan to income ratios above 450% — has surpassed pre-pandemic levels to hit new records.

Druckenmiller Warns ‘Bear Market Has a Ways to Run’ as Fed Hikes Rates

“My best guess is that we’re six months into a bear market,” Druckenmiller, who runs Duquesne Family Office, said Thursday at the 2022 Sohn Investment Conference. “For those tactically trading, it’s possible the first leg of that has ended. But I think it’s highly, highly probable that the bear market has a ways to run.” (…)

The catalyst for additional losses is that the Federal Reserve has turned aggressive about tackling the highest inflation in decades. That will likely lead to a recession at some point in 2023, Druckenmiller said.

About a year ago, he said the central bank’s policy was totally inappropriate and that “we are in a raging mania in all markets.” (…)

Because US Treasury yields are so much lower than inflation, he said he’s not confident bonds will hold up in a downturn as they have in the past. So he’s largely taking a break from trading for now. (…)

He also said he’s looking to bet against the dollar sometime in the next six months.

“If you’re predicting a soft landing, it’s going against decades of history,” he said.

Greenlight Capital’s David Einhorn, appearing at the same conference, said inflation is the big problem and that it’s likely to persist, in part because of under-investment in things such as cement, housing, mining oil and paper.

Retail loves splits Retail participation in AMZN shares jumped post stock split

JPM via The Market Ear

Business Losses From Russia Top $59 Billion Nearly 1,000 Western companies plan to leave the country or cut back operations, with more write-downs expected as sanctions hit.