Note: I will be traveling until June 27, with limited posting whenever possible given limited time, equipment and time zone constraints.
Fed Holds Rates Steady but Expects More Increases
New economic projections, released Wednesday after their two-day policy meeting, strongly suggested officials were leaning toward slowing down their increases rather than stopping them altogether. Most of them penciled in two more rate increases this year, which would lift them to a 22-year high, and boosted their expectations for growth and inflation. (…)
“We don’t know the full extent of the consequences of the banking turmoil that we’ve seen,” Powell said Wednesday. “It would be early to see those.” (…)
The projections Wednesday showed 12 of 18 officials think they will need to raise rates to between 5.5% and 5.75% this year—or higher—if the economy performs in line with their expectations. That would imply two additional quarter-point increases at any of four meetings later this year.
Another four officials projected rates would need to go up by only a quarter point. Two anticipated that rates could stay at their current levels for the rest of the year.
In March, most officials projected no further increases after lifting the fed-funds rate to its current level. (…)
Officials’ projections of penciling in two further increases this year, which was more aggressive than many interest-rate strategists had anticipated, offered a way to unite hawkish Fed officials that would have favored lifting rates this week with those who were more dovish, including Powell, who wanted to wait, said Swonk.
“This was the ultimate way that Powell corralled the cats, yet again,” she said. “He clearly is more dovish than some of his colleagues right now, but by all-but-guaranteeing a July rate hike, he was able to keep everyone on the same page.”
Powell offered few clues about what would lead the central bank to raise rates next month. Some analysts said Powell’s decision to forgo a rate rise Wednesday would prove to be a mistake.
“It will be harder next time to raise rates than they realize,” said Vincent Reinhart, a former senior Fed economist who is now chief economist at Dreyfus and Mellon. “The data probably will be a little bit more ambiguous. Their headline explanation is that they will know much more in six weeks, but the fact is they won’t know much more in six weeks. Chances are, they’ll be more confused in six weeks.” (…)
Is there any way to get this straight?
The Fed pauses to assess what +500bps will do to the economy (“the full effects of our tightening have yet to be felt”) while simultaneously showing projections of higher inflation and a more positive view of the economy and employment than their forecasts last March.
Again, +500bps did very little, if anything, to the economy and inflation (“There’s just not a lot of progress in core inflation”), but let’s see if a pause could help. They pause to get more info, hoping demand will finally slow down, but the info they actually got led them to raise their forecasts. 
Note also that the Fed’s staff no longer sees a recession this year…
Bond Traders Step Up Bets the Fed Will Steer US Economy Into Recession
Policy-sensitive front-end Treasuries sold off Wednesday, while longer-date bonds rallied, after Fed officials indicated that they’re prepared to raise interest rates by another half-point this year following the first pause in the central bank’s 15 month hiking campaign. That sent the yield-curve inversion, as measured by the gap between two- and 10-year securities, to more than 90 basis points — a level last seen in March — and approaching this cycle’s 109 basis point extreme.
The price action suggests bond traders are skeptical that policymakers can avoid a so-called hard landing as they continue to press the case for higher borrowing costs in an effort to get a handle on inflation that remains more than double their 2% target.
“The Fed runs the risk of solving one policy error of being too easy for too long with another policy error as they ignore the growing credit contraction and persistent losses from higher rates,” said George Goncalves, head of US macro strategy at MUFG. “The catch-22 is that for them to ease, something now has to break or the economy has to crack.”
It’s not just bond traders who are growing concerned.
Sixty-one percent of respondents in a Bloomberg poll of terminal users conducted in the hours after the Federal Open Market Committee decision said tighter monetary policy will ultimately cause a recession at some point in the next year.
“The Fed was clearly trying to send a hawkish message that they are not quite done yet and don’t think they have made enough progress on inflation,” said Michael Cudzil, portfolio manager at Pacific Investment Management Co. “You see curve flattening and rates not pricing in the full extent of hikes, so the thinking is that these hikes may bite and the Fed is closer to the end.”
Officials (…) also revised higher estimates of core inflation for year-end to 3.9%, from 3.6%, owing to what Chair Jerome Powell called surprisingly persistent price pressures.
Still, markets aren’t convinced borrowing costs will rise as high as central bankers project.
The highest rate on swap contracts for future meetings by late Wednesday was about 5.27% in September, with the one for July at 5.26%, compared to a current Fed effective rate of 5.08%. (…)
“Inflation pressures continue to run high and the process of getting inflation back down to 2% has a long way to go,” Powell said at a post-meeting press conference. (…)
Powell said he and his colleagues still think inflation risks are tilted to the upside, though he said the risks of doing too little or too much “are getting closer to being in balance.”
He suggested rate cuts are probably “a couple of years out” once inflation comes down significantly. (…)
For 2023, the median estimate for gross domestic product growth was marked up to 1% from 0.4% in March.
Unemployment is forecast to average 4.1% in the fourth quarter, compared with 4.5% projected in March. The official jobless rate stood at 3.7% in May.
The PCE inflation rate was expected to be 3.2% this year, down from 3.3% projected in March, but the core inflation projections increased.
Walmart-backed fintech ONE raises savings rate as battle for deposits heats up
ONE, a fintech company backed by Walmart Inc (WMT.N), is offering 5% interest on savings accounts of up to $100,000 as of Wednesday, a source close to the company said, as the battle for consumer deposits intensifies.
The rate is more than 12 times the national average of 0.4%, the source said, citing Federal Deposit Insurance Corporation data.
Apple Inc began offering 4.15% on its Apple Card savings accounts in April in partnership with Goldman Sachs Inc. Step, a fintech app catering to younger customers, offered 5% in May.
China’s Recovery Weakens as Industrial, Retail Activity Slow
- Industrial production rose 3.5% in May from a year earlier, the National Bureau of Statistics said Thursday, in line with the median estimate in a Bloomberg survey of economists
- Retail sales climbed 12.7%, missing the median estimate of a 13.7% increase
- Growth in fixed-asset investment slowed to 4% in the first five months of the year, weaker than forecasts of a 4.4% uptick
- The urban jobless rate was unchanged at 5.2%
China’s slower home price growth, deepening investment slump signal more easing
China’s new home prices rose at a slower pace in May, while the steepest slump in property investment in over two decades underlined the depth of demand problems in the crisis-hit property sector and pointed to more easing steps on the cards.
New home prices in May rose 0.1% month-on-month, slower than a 0.4% gain in March, according to Reuters calculations based on National Bureau of Statistics (NBS) data.
Separate NBS data also showed property investment fell at the fastest pace since at least 2001, down 21.5% year-on-year from 16.2% drop in April, according to Reuters calculations.
Property sales by floor area also slumped deeper, falling 19.7% from 11.8% drop in April. (…)
China’s economy is way more screwed than anyone thought
(…) The problem is that while consumers may be picking up, the biggest drivers of the Chinese economy — property and exports — are going to stay dormant. Consumer consumption makes up about 37% of the Chinese economy (in the US that figure is about 70%). So a return to normal activity from consumers is helpful, but it’s not enough to carry the economy.
China was never going to be able to deliver on the miracle reopening that Wall Street wanted without getting the wheels of its massive export and property machines moving. Beijing has tried to shift the country toward a consumption model, like the US, but exports still make up 20% of China’s economy.
In May, outbound shipments declined by 7.5%, the first decrease this year. The slump is largely due to a general global economic slowdown, but it’s also due in part to unfavorable geopolitical dynamics that seem to worsen by the day. Imports, an important indicator of China’s domestic health, also slowed. Beijing put the entire economy in a deep freeze during COVID, but that doesn’t mean reopening will heat things up. China’s economic return will be lukewarm at best. (…)
China is facing a long, painful road ahead, and policymakers in the Chinese Communist Party seem uninterested in market-oriented solutions to ease their journey. “The root causes of the disappointing recovery look increasingly structural — a deleveraging mindset and a more permanent loss of animal spirits,” Societe Generale’s Yao warned in her recent note. (…)
For years, China’s local governments funded themselves largely by selling land to property companies. In the US, we fund local governments through property taxes. China doesn’t have that, and smaller, poorer provinces are already begging for help because the way they used to raise funds is no longer available. (…)
Property was supposed to be a safe investment for China’s savers. Over 70% of China’s wealth is tied up in real estate. It was the investment that secured a family’s place in the middle class. And the problem isn’t just for older people nearing their twilight years — the property bust is hurting the prospects for the next generation, too. Some starved local governments are raising college tuition fees as high as 54% at a time when youth unemployment is over 20% and a record number of students are trying to get a higher education. (…)
Last year, China made up 50.7% of US imports from Asia; that’s down from over 70% in 2013, according to the management-consulting firm Kearney.
1 thought on “THE DAILY EDGE: 15 Jun 2023”
Third world economies including India probably can’t make up for the slack from China’s economic slowdown for a simple reason-low standards of primary schools education for the masses. If, say, 5% of India’s 1.4 billion people are well educated, that’s 70 million. But in the economy can this 70 million carry along the other 1,330 million which include a high proportion of illiterate and functionally illiterate people, achieving high growth?
An anecdote I heard years ago suggests not. A Canadian furniture maker impressed by low Mexican wages dismissed the Canadian workforce and moved the machinery to Mexico. But the Canadians couldn’t teach the poorly educated Mexican labourers to apply subtle finishing touches to the furniture. Such labourers have poor memories due to poor childhood nutrition and poor primary education and require a big multiple of the instructions in work practices needed by educated workers. So the Canadians gave up, moved the machinery back to Canada and rehired the Canadian workers.
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