Fed Raises Rates by 0.75 Percentage Point, Largest Increase Since 1994 Officials signal a much more aggressive path of rate rises to fight inflation that is running at a 40-year high
Officials agreed to a 0.75-percentage-point rate rise at their two-day policy meeting that concluded Wednesday, which will increase the Fed’s benchmark federal-funds rate to a range between 1.5% and 1.75%.
New projections showed all 18 officials who participated in the meeting expect the Fed to raise rates to at least 3% this year, with at least half of all officials indicating the fed-funds rate might need to rise to around 3.375% this year. (…)
“It is not going to be easy,” Mr. Powell said. “There’s a much bigger chance now that it’ll depend on factors that we don’t control. Fluctuations and spikes in commodity prices could wind up taking that option [soft landing] out of our hands.” (…)
“Clearly, today’s 75-basis-point increase is an unusually large one, and I do not expect moves of this size to be common,” Mr. Powell said. “From the perspective of today, either a 50-basis-point or a 75-basis-point increase seems most likely at our next meeting” on July 26-27. (…)
“We think that policy is going to need to be restrictive, and we don’t know how restrictive,” he said. (…)
The Fed’s monetary-policy statement removed a line that, in May, had indicated officials expected inflation to return to 2% and for the labor market to remain strong as it raised rates. Mr. Powell said the removal of that sentence reflected the sense that the Fed couldn’t reduce inflation to 2% by itself while maintaining a strong labor market.
“The worst mistake we could make would be to fail” to bring down inflation, Mr. Powell said. “It’s not an option. We have to restore price stability.” (…)
The median projection [dot plot] showed the unemployment rate, which stood at 3.6% in May, ending at 3.7% this year before rising to 4.1% in 2024.
“You’re seeing continuing shifts in consumption…but overall spending is very strong,” he said. (…)
“Overall spending is very strong,” Mr. Powell told reporters, adding the central bank isn’t seeing a broad slowdown. “We see the economy slowing a bit but still at healthy growth levels,” he said.
U.S. Retail Sales Declined in May as Inflation Stings Consumers Consumers pulled back on car purchases, online shopping, and spent more at gasoline stations
Retail sales—a measure of spending at stores, online and in restaurants—fell a seasonally adjusted 0.3% in May from the previous month, the Commerce Department said Wednesday. That was the first decline in month-over-month retail spending this year. (…)
A sharp drop in vehicle sales—due to high prices, low inventory and rising interest rates on car loans—played an outsize role in the decline in month-over-month retail spending. Consumers also pulled back their spending on goods such as furniture, electronics and online purchases. (…)
JPMorgan Chase & Co. analysts lowered their forecast for U.S. gross domestic product growth to an annual rate of 2.5% in the second quarter from 3.25% previously. Data firm IHS Markit cut its growth estimate to 0.9%.
Excluding autos and gasoline, retail sales rose just 0.1% in May, well behind the pace at which prices increased last month. Unlike other reports compiled by the government, retail sales aren’t adjusted for inflation. Soaring gasoline and grocery prices meant households shelled out more on them in May—Americans are spending over 43% more on gasoline than a year ago and nearly 9% more on groceries.
Retail sales were up 8.1% last month from a year earlier, a robust gain but below the blistering pace of inflation, which was up to 8.6% in May from a year earlier, according to the Labor Department’s consumer-price index. (…)
The retail sales report mostly covers spending on goods rather than services, but it said that receipts at bars and restaurants were up 0.7% in May, a sign that Americans are continuing to dine out. (…)
High and rising inflation is hiding some of the real trends.
- Real retail and food services sales per the St-Louis Fed declined 1.2% MoM in May and -4.0% annualized in the last 3 months.
- Control sales which feed directly into GDP were flat in May but down 0.7% MoM after accounting for the 0.7% rise in core goods prices.
- Excluding restaurants and bars, real control sales slowed from +1.0% MoM in March to +0.3% in April and -0.8% in May. The bite from food and gas prices is large and deepening.
- While restaurants and bars sales rose 0.7% in May, they were flat in real terms after +1.7% in March and +1.3% in April.
The Chase card spending tracker suggests very poor overall demand in June. Its control retail sales tracker is down 4.0% through June 10 while its restaurants and airlines spending trackers also weakened so far in June.
So, when Powell says that “overall spending is very strong”, that “the central bank isn’t seeing a broad slowdown” and sees the economy “still at healthy growth levels”, he may be just as wrong as he has been on inflation. The price of gas is up 13% so far in June.
Mr. Powell admitted that the consumer is key and assured us that “we are watching that very very carefully”. We hope.
The FOMC dot plot shows the unemployment rate rising from its current 3.6% to 3.7% in December and 4.1% in 2024. A 0.5% increase spread over 31 months. That’s not a soft landing, rather a beautiful dream in slow motion. Didn’t he say in the presser that “we want to be transparent”?
It so happened that May retail sales came out yesterday morning. The Atlanta Fed posted its revised GDPNow data shortly before the FOMC meeting: it is now at 0.0% for Q2. Real GDP was down 0.4% QoQ in Q1…
U.S. Home Builder Index Declines Further in June
In yet another indication of weakness in the housing market, the Composite Housing Market Index from the National Association of Home Builders-Wells Fargo fell 2.9% (-17.3% y/y) in June to 67 from 69 May. It was the lowest level since June 2020.
The index measuring traffic of prospective buyers fell 9.4% (-32.4% y/y) to 48 from 53 in May. The index stood at the lowest level since June 2020. The current sales reading fell in June by 1.3% (-11.5% y/y) to 77 from 78 in May and stood at its lowest level also since June 2020. The index of expected sales in the next six months weakened 3.2% (-22.8% y/y) to 61 from 63 in May. The index peaked at 89 in November 2020.
Regional activity weakened in most sections of the country this month. The reading for the Northeast plunged 18.4% (-16.2% y/y) to 62. The index for the West declined 12.2% (-24.4% y/y) to 65. In the South, the index declined 1.3% (11.8% y/y) to 75. Moving higher by 5.9% (-22.9% y/y) was the index for the Midwest to 54.
Home Prices in Canada Fall Again as Mortgage Pain Intensifies
Canada’s benchmark home price fell 0.8% to C$822,900 (about $635,000) in May from the month before, according to data released Wednesday by the Canadian Real Estate Association. Cities in Ontario showed the biggest declines.
Sales also dropped sharply, falling 8.6% from the previous month, the association said.
The drop comes after Canadian home prices shot up more than 50% over a two-year period as ultra-low interest rates and demand for larger living spaces led to bidding wars for properties.
(…) the cooling in the national market has only brought activity back to levels that are more in line with historical norms. The number of sales in May was slightly above the 10-year average for the month, for example.
The ratio of sales to new listings, a measure of market tightness, fell to 57.5% — a three-year low that is close to its longer-term average, data from the real estate association showed.
Even with the market shifting and the number of listings rising, though, Canada still had just 2.7 months of housing inventory available on the market at the end of May, about half the longer-term average, the data show.
A separate report released Wednesday by the Canada Mortgage & Housing Corp. showed supply ramping up. Housing starts rose 8% in May to an annualized pace of 287,300 units, exceeding economists’ expectations.
The ECB: what else can we expect? Ms. Lagarde had assured the market that the ECB has the tools to avoid fragmentation.
This is from John Authers:
Italian bond yields matter far beyond Italy. The country has one of the world’s most liquid bond markets, and also an amount of debt outstanding that far exceeds GDP. A decade ago, the country suffered through the euro zone’s sovereign debt crisis, as markets attacked the debt of peripheral countries. The belief was that the structure of the euro zone wouldn’t hold, and that Italy and others would be forced to accept larger deficits than the area permitted.
That crisis subsided because the European Central Bank convinced all-comers that it was prepared to step in to avert defaults and sustain the euro. But that was with inflation painfully low.
Now with inflation much higher, it is harder for the ECB to make such promises. Following last Thursday’s hawkish press conference by the ECB’s president, Christine Lagarde, at which she failed to offer any mechanisms to stop debt spreads from ballooning, there was a big selloff of Italian bonds. As a result, 10-year BTP yields are above 4%, while their spread over German bunds is approaching 2.5%.
The growing risk of fragmentation more than counteracted the ECB’s move toward tighter monetary policy on the foreign exchange market, and pulled the euro downward. All of this was enough to prompt an emergency meeting of the European Central Bank, which took place Wednesday morning.
The fact of the meeting was enough to spur a recovery for the euro, but that was all canceled out once the result was known. This was the deathless prose that disappointed the FX market:
the Governing Council decided to mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council.
In translation, the governors now want the technocrats below them to hurry up and hatch some kind of plan that will stop the yields of different euro zone countries drifting further apart. Once they’ve come up with an idea (at an unspecified date) then they will offer it to the governors for “consideration.”
It doesn’t sound like they have much clue what this plan will be yet, and it also sounds as though it could take a while to get through the European sausage-making machine.
In short, inflation has exposed the ongoing flaws in the euro zone once more, the ECB is worried enough to convene a meeting (in person!) to try to deal with it; and the sum total of all their activity in the last week has been to convince the markets that they need to worry about this. (…)
Benchmark futures increased as much as 24%, adding to a 46% rise already this week. The cuts are rippling through Europe with companies including Eni SpA, Engie SA andUniper SE saying they’re getting less supply. Germany has called the reductions through the Nord Stream pipeline “politically motivated” and aimed at unsettling markets, challenging Gazprom PJSC’s statement that the halt was due to technical issues. (…)
The latest crisis could hit key industries from chemical to steelmakers, a body blow for the region that’s already struggling with surging inflation and meager growth. Gas rationing is becoming a real prospect. (…)
Utility Uniper said Wednesday it had received 25% less than contracted from Russia, while Austria’s OMV AG and France’s Engie also got lower volumes. Italy’s Eni said Gazprom was providing only 65% of the requested amount on Thursday. (…)
Delays in filling inventories could lead to a tough winter, especially if Russian supply at the time continues to be curbed. “Gas prices will continue in the winter to be very high,” Marco Alvera, former chief executive officer of Italian network operator Snam SpA said at a conference on Thursday. “Winter gas prices will be high, winter power prices will be high.” (…)
Russia’s pipeline gas cuts are stoking prices in Asia too. Asian spot LNG on Thursday were seen rising above $30 per million British thermal units for the first time since April, according to traders. That’s the highest level for this time of year, and a roughly 50% jump in the last month.
Further disruptions to gas or LNG flows could amplify price moves. “If we get another outage like what happened at the Freeport LNG in the US prices could easily jump another 50%,” said Ron Smith, senior oil and gas analyst at BCS Global Markets.
Bank of England raises interest rates by 0.25 percentage points Policymakers warn inflation is likely to rise above 11% by October
Swiss National Bank raises rates in shock move, ready for more It was the first increase by the SNB since September 2007
Prices for New Homes in China Slide Further Government support measures for the industry have yet to take hold after a yearlong regulatory campaign aimed at reining in developers’ debt levels.
Data released on Thursday by China’s National Bureau of Statistics showed that average new-home prices in 70 major Chinese cities declined 0.79% in May from a year earlier. That was worse than a 0.11% year-over-year pullback in April, which was the first month in which home prices had fallen by this measure in more than six years.
Just 23 of the 70 Chinese cities tracked by the government reported yearly growth in average new-home prices, down from 30 cities in April.
Compared with the previous month, average new-home prices fell 0.17% in May, marking a ninth consecutive monthly decline, according to Wall Street Journal calculations based on statistics bureau data.
A day earlier, official data showed home sales by volume, a key indicator of buyer demand, falling 34.5% in the first five months of 2022 when compared with the same period a year earlier. (…)
In May, sales at the 100 largest property developers dropped 59.4% from a year earlier, according to data compiled by property consulting firm China Real Estate Information Corp. It was the 11th consecutive month of falling sales volumes, the firm’s data showed.
Country Garden Holdings Co., one of China’s largest developers, reported a 50% drop in contracted sales last month from a year earlier, while another big developer, Sunac China, experienced an 82% year-over-year slump in May sales after defaulting on a dollar bond recently. These and other developers have also reported much bigger declines in selling prices than China’s official new-home price data shows. (…)
In recent months, more than a hundred Chinese cities have taken easing steps, including lowering down-payment requirements, lifting curbs on home purchases and offering subsidies to boost home-buying demand. (…)
Despite the efforts at reversing some of the damage, Goldman Sachs economists told clients in a note Thursday that they expect the property sector slowdown to wipe 1.4 percentage points from this year’s growth in the headline gross domestic product figure. (…)
Sheng Guoqing, an analyst at the statistics bureau, noted that while monthly home prices have been sliding for nine straight months, the pace eased somewhat in May. More of the 70 cities tracked by the statistics bureau also reported average home-price increases on a monthly basis—25 cities compared with April’s 18 cities.
Home prices in first-tier cities, which include economic dynamos Beijing, Shanghai, Shenzhen and Guangzhou, rose 0.4% in May from the previous month, accelerating from a 0.2% month-over-month increase in April, Mr. Sheng said. Prices in second-tier and third-tier cities either stayed flat or declined more slowly on a monthly basis, he added.
Jim Chanos On Why Some of the Worst-Hit Stocks Still Have a Long Way Down And it’s not just the tech and meme stuff that’s vulnerable here.
He argues that investors have yet to grasp what the potential end of low interest rates means for the market cap of a wide variety of companies. (…)
Sectors including consumer packaged goods companies, real estate and even utilities will also be vulnerable to sustained higher rates as an era of cheap and plentiful capital comes to a close. (…)
“That’s the one thing that people are not prepared for still, is interest rates resetting meaningfully higher because it hasn’t happened in most investors’ lifetimes,” Chanos said. “The idea that actually interest rates are not going to be 2% or 3% for the foreseeable future is going to be hard for a lot of investors to deal with.” (…)
While higher rates are kryptonite for the frothiest assets in the market, they’re also a problem for other sectors too — including some which have been considered to be more defensive — such as real estate, consumer goods and utilities.
“Just take almost the whole cross section of Reits,” Chanos said. “It just seems absurd to us that you’re gonna be buying, you know, apartment buildings at a 3% cap rate that’s before capital spending. That’s pre-tax.”“Even things like electric utilities and consumer package good companies,” he added. “I mean, these things are all still trading at 25, 30 times earnings. And I think that they’ve seen been seen as defensive because they’re not technology, but at this point they may have as much risk as the tech stocks.” (…)
Chanos notes that historically money-losing financials — including many European banks — have traded for less than one times their tangible book value, which implies that names like Coinbase and Robinhood still have further to fall. (…)
China’s Xi Reaffirms Support for Moscow
(…) The Chinese readout of the Wednesday call was emblematic of Beijing’s position in neither criticizing nor endorsing Russia’s invasion of Ukraine, while the Russian description of the call contained language suggesting Moscow has Beijing’s backing for the war.
“China is willing to continue mutual support with Russia on issues related to core interests and major concerns such as sovereignty and security,” Mr. Xi said during the call, according to China’s Foreign Ministry.
The statement from the Kremlin said the Chinese leader “noted the legitimacy of the actions taken by Russia to protect the fundamental national interests in the face of challenges to its security created by external forces.” (…)
In internal meetings over the past year, according to Chinese officials and foreign-policy advisers, Mr. Xi has emphasized the U.S. as the biggest threat to China’s interests, shifting Beijing’s foreign-policy focus toward aligning with Moscow and away from building ties with Washington. These days, a prevailing view in Beijing’s corridors of power is that the U.S. will shift its attention to further contain China as Russia gets increasingly weakened by Western sanctions. (…)
Mr. Xi also told Mr. Putin that all parties should push for an “appropriate settlement” of the crisis, and that China would continue to do its part in that process.
Mr. Putin in turn offered his support for China on issues including Xinjiang, Taiwan and Hong Kong, saying Russia opposes any interference in China’s affairs, according to the Chinese readout. (…)
The Kremlin readout of Wednesday’s call, however, noted that “the issues of further development of military and military-technical ties were also touched upon.” It didn’t elaborate. (…)
“There has been a broad-based decline in China’s exports to Russia, especially when it comes to electronics and vehicles,” Mr. Chorzempa said. “We’re not seeing China filling the gap created by Western sanctions on Russia.”