Inflation Fears Drove Larger Fed Rate Increase in June Officials want to lift interest rates to levels that would slow economic growth; ‘an even more restrictive stance’ is possible if inflation doesn’t ease
“Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” the minutes said.
“They recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” the minutes said. (…)
As a result, the minutes also revealed officials’ growing acceptance that fighting inflation might lead to higher risks of a recession, but they saw that as “a cost they’re willing to pay,” said Michael Feroli, chief U.S. economist at JPMorgan Chase. (…)
The minutes showed an unusual level of agreement among the 18 officials who participate in the policy-setting meetings: All but one supported the 0.75-point increase. (…) All the officials at the meeting projected the rate would need to rise at least to 3% this year, and most expected rates would need to rise to between 3.5% and 4.5% next year. (…)
“Many participants judged that a significant risk now facing the committee was that elevated inflation could become entrenched if the public began to question the resolve of the committee to adjust the stance of policy as warranted,” the minutes said. (…)
The minutes provided little detail around what might prompt the central bank to slow down its current pace of rate increases except to note that by raising rates faster now, officials might have more flexibility later. That language fanned hopes on Wall Street that the central bank would slow or even pause rate increases later this year. (…)
Hiring Demand Remained Strong in May Employers posted 11.3 million job openings in May, the Labor Department said, a sign the job market remained unusually tight
The Labor Department on Wednesday said there were a seasonally adjusted 11.3 million job openings in May, a decline from an upwardly revised 11.7 million the prior month [initially 11.4M]. That marked the second straight month of a decrease from a record high number of openings reached in March, but it was nearly double the 5.95 million people who were unemployed but looking for work in May.
The number of times workers quit their jobs fell slightly to 4.3 million from the prior month, while the number of layoffs and discharges rose to 1.4 million in May from 1.2 million the prior month. (…)
The Labor Department will release its June employment numbers on Friday; economists surveyed by The Wall Street Journal think employers created 250,000 jobs last month and the unemployment rate held at 3.6%. (…)
BTW, of the 415k decreases in private openings, 196k (47%) were in services and 208k (50%) in manufacturing.
This chart plots openings in 3 services sectors that account for half of current job openings. Openings in Accommodations and Food Services are down 22% YtD and the other two sectors have crested.
This is up to May. Read on:
U.S. SERVICES PMIs
S&P Global: New orders decline for first time since July 2020
US service providers saw new orders decrease midway through the year, according to the latest PMI™ data, with sustained price pressures and economic uncertainty hitting demand. The decline in new business was the first in almost two years and contributed to a slowdown in growth of activity. Meanwhile, business confidence regarding the year ahead outlook dropped to a 21-month low. On a more positive note, employment continued to increase sharply.
A further substantial rise in input prices was recorded in June, although inflation did ease from May’s survey peak. Rising wages played a key role in higher input costs, with increased fuel charges also widely mentioned. Firms often passed on higher costs to their customers, but efforts to stimulate demand led to a further slowdown in charge inflation.
The seasonally adjusted final S&P Global US Services PMI Business Activity Index registered 52.7 in June, remaining above the 50.0 no-change mark and thereby signalling a further increase in business activity. A recent spell of new order growth amid a lack of pandemic disruption supported continued output expansion. That said, the index dropped for the third month running and was down from 53.4 in May, pointing to the weakest rise in activity since January.
Some firms highlighted the negative impact of inflationary pressures on business activity, and this was also the case with regards to new orders, which decreased for the first time since July 2020. Economic uncertainty was also a factor leading new business to fall, according to respondents.
Alongside a decline in total new business was a renewed contraction in new export orders, which decreased at a solid pace. The reduction ended a seven-month sequence of growth.
Steep price pressures were recorded again in June. The rate of input cost inflation slowed from May’s survey record, but was still among the fastest since the series began in October 2009. Higher wages were one of the main drivers of rising input costs in the latest survey period, with increasing fuel prices also widely mentioned. Some 56% of respondents Index signalled a rise in input costs over the month.
The passing on of higher input costs to customers resulted in a further marked increase in selling prices in the US service sector. That said, the rate of inflation slowed sharply for the second month running and was the softest since last September. Some panellists reported trying to price competitively to attempt to stimulate new business in a weakening demand environment.
Service providers continued to raise their staffing levels rapidly, with firms hiring to support growth of activity and fill previously vacant positions. The sharp increase in employment was recorded despite some reports of difficulties finding suitable staff.
The combination of rising staffing levels and falling new orders meant that companies were able to deplete their backlogs of work in June. The drop in outstanding business was the first in two years and represented a marked turnaround from the record accumulation seen as recently as March.
Concerns around customer demand, in some cases linked to inflationary pressures and rising interest rates, led to a sharp drop in confidence regarding activity over the coming year. Sentiment was the lowest since September 2020. Those companies continuing to predict growth of activity mentioned rising workforce numbers, the start of new projects and hopes for an improvement in new orders.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:
“June saw signs of a broad-based weakening of the economy with demand now falling in both the manufacturing and service sectors. While the survey data point to a stalling of GDP at the end of the second quarter, a downshifting in the forward-looking new orders index and drop in companies’ future output expectations hints at falling economic activity as we head through the summer.
“Demand for goods and services from households is showing signs of moderating substantially due to the rising cost of living. Meanwhile, tighter financial conditions are starting to hit, and it was notable that the service sector slowdown was led by a steep drop in financial services activity.
“Meanwhile there was welcome news in terms of a marked easing in upward price pressures, but it’s clear that price growth remains elevated despite coming off recent peaks, all of which points to a bout of stagflation in the near term.”
Services PMI New Orders
Employment Prices
WHAT RESPONDENTS ARE SAYING
- “Supply chain and supplier reliability continues to improve for most of our key food and packaging needs. Equipment still (experiencing) typical long delays. Staffing employment challenges have resurfaced, and costs have dramatically increased on core needs, led by soybean oil products. Rise in diesel fuel affecting almost everything.” [Accommodation & Food Services]
- “(Interest) rate increases have slowed sales but have not helped with supply challenges yet.” [Construction]
- “While activity dropped 2 percent from the previous month, activity volume was 47 percent higher compared to May 2021.” [Educational Services]
- “It seems like everyone is jumping on the bandwagon (of) raising prices under the guise of inflation, cost of energy and shortages. Costs on even software renewals have gone up between 5 and 10 percent. This is getting out of control, and we need to be diligent in researching the cause of rising prices on every transaction.” [Public Administration]
- “The shutdowns in China due to the zero-COVID policy have adversely impacted our supply chain.” [Health Care & Social Assistance]
- “Demand has softened across consumer product lines, channels and brands over the last year, to levels below those forecast earlier this year. Adjusting all outlooks down for the rest of year. The (Shanghai) omicron slowdown had an impact, but activity is slowly coming back.” [Information]
- “Energy services sector demand and activity remains strong.” [Mining]
- “Consumers are shifting purchases away from our discretionary products to essentials. Inflation is definitely taking a bite from our sales, and mall traffic is far below the norm, potentially due to inflation, a need for more disposable income on essentials and less willingness to drive to malls. E-commerce sales will be going up again.” [Retail Trade]
- “Despite higher inflation and energy costs, demand and business activity continue to be at record highs, with little sign of a slowdown.” [Utilities]
- “Business continues to stay steady amid rising interest rates, a lack of labor, inflation, transportation problems and high gas/diesel prices. Outlook is measured due to economic headwinds.” [Wholesale Trade]
The weakening trend in new manufacturing orders is now joined by declines in services, taking composite new orders below 50, something that has not happened this cycle except right after the arrival of Covid-19.
This slower demand is having an impact on input prices which is having an impact on selling prices:
The slower growth of costs fed through to weaker selling price inflation in all sectors bar technology. The steepest slowdown in the rate of inflation was seen in financial services, linked to greater discounting amid the recent slowing of demand amid rising interest rates. The most elevated rates of inflation were meanwhile seen for basic materials and consumer goods, the latter in part reflecting higher food prices.
The concern is, however, that with the economy already stalled according to the June survey, an imminent economic contraction seems plausible, especially given the weakness of forward-looking indicators such as survey’s new orders and business expectations indices. The former is already signalling a downturn in demand and the latter has dropped to the lowest since September 2020.
This is happening globally. I created this illustrated story from recent S&P Global’s charts and comments:
June saw worldwide input cost inflation in the service sector exceed that of manufacturing for a second month, reversing the trend of manufacturing-led inflation seen throughout much of the prior post-pandemic period. Although rates of increase moderated in both sectors at the end of the second quarter, in both cases rates of increase remained among the fastest seen in the survey history.
Meanwhile the number of companies reporting items to have risen in price has also fallen in recent months, dropping in June to the lowest since December 2020 (see chart 7).
Supply shortages generally remain significantly above long-run averages and, in the case of semiconductors, even worsened in June, but appear to have moderated for a wide array of key inputs, including general electrical components, chemicals, timber, packaging, steel, aluminium and even food.
The easing in supply chain delays is associated with a cooling of demand growth in manufacturing, which is in turn linked to slower than anticipated sales to customers in many cases, but also reflects a growing trend of firms moving away from safety stock building towards destocking, designed to cut costs in the face of an economic slowdown.
The impact of fewer supply delays and weakened manufacturing demand on industrial prices is further illustrated by chart 10 and explored in more detail in our recent analysis of the global manufacturing sector. The current situation appears to be one of persistent – albeit moderating – supply shortages providing the main support to prices, offsetting to some extent the drag from weakened demand.
As for wage growth, labour markets remain tight and there have been rising incidences around the world of upward wage negotiating power linked to strikes. However, even these labour market pressures could soon moderate if global demand for goods and services continues to falter. As chart 13 shows, it would be unusual for hiring to remain at current levels in the face of the weakening of demand seen in recent months (read more in our global overview here).
To summarize, demand is slowing across the board and across the world while inventories are elevated following the frantic buying of the past year. Supply channels are improving while commodity prices are declining. This is slowing input costs inflation. Add rising discounting to sustain demand and liquidate excess inventories and you get slower selling prices inflation.
Dropping new orders and reduced growth expectations are about to impact employment which will then help ease wage pressures.
Such increasingly plausible narrative has not reached FOMC members yet.
Roaring US Rental Market Shows Early Signs of Slowing Down
After surging 11.4% over the past 12 months, the median national rent for a one-bedroom apartment rose just 0.5% in June compared to a month earlier, while the median two-bedroom rent fell 2.9%, according to data from rental marketplace Zumper. (…)
Rents typically peak during the summer months, but surging inflation and talk of a recession are causing Americans to tighten their belts and reconsider their living arrangements, whether it’s moving in with roommates or sacrificing on space and location. Rising mortgage rates are also forcing some home sellers to slash their listing prices, creating “pockets of opportunity for renters who’ve been looking to buy a home for years” and likely contributing to the drop for two-bedroom apartments, Zumper said. (…)
Toronto Home Sales Plunge 41%; Prices Drop for Fourth Month
The average price of a home in the country’s largest city fell 3% in June to C$1.14 million (about $875,000) on a seasonally-adjusted basis, bringing the total decline to more than 11% since February, according to data released Wednesday by the Toronto Regional Real Estate Board.
Fewer than 6,500 homes were sold during the month, down nearly 5% from the previous month — and 41% lower than a year ago. (…)
The number of homes for sale in Toronto soared 43% in June from the same month last year, to more than 16,000, while properties are now staying on the market an average of seven days longer, the report shows. (…)
A separate report Tuesday showed Vancouver, long Canada’s most-expensive housing market, register a 2% drop in its benchmark home price in June.
- Toronto Office Vacancies Rise to a Record on Recession Fears The rate rose to 11.9% as nearly half a million square feet of space that became available downtown in Canada’s financial capital failed to find a tenant, according to a report Wednesday by commercial brokerage CBRE.
Companies Plan Additional Cuts to Office Space Amid Looming Downturn Finance executives are analyzing data on workers’ office usage and the economic outlook to gauge another round of real-estate reductions
(…) Vacancies have increased across the U.S. over the past year. About 17.5% of office space across the country wasn’t leased or was leased but available for sublease at the end of the second quarter, up from 16.5% a year earlier and 13.2% five years earlier, commercial real-estate firm Cushman & Wakefield PLC said.
Occupancy rates also remain below prepandemic levels. During the week ended June 29, the average occupancy rate in 10 major U.S. metro areas was 44% down from over 95% before the pandemic began, according to Kastle Systems, which operates security systems in U.S. office buildings. Kastle tracks how many people are entering buildings based on anonymized data from its swipe-entry systems. (…)
About 52% of companies expect to shrink their office space over the next three years, up from 44% a year earlier, a recent CBRE survey among 185 businesses with U.S. offices found. That’s compared with 39% that intend to expand, up from 29% a year earlier, and 9% that foresee no change, down from 27% a year earlier. (…)
Euro Area Retail Sales Remain Weak
(…) In May total retail sales volume in the euro area rose by 0.2% following a 1.4% drop in April and a 0.5% increase in March. Over three months, the retail volume is declining at a 2.8% annual rate; that’s an improvement from the six-month growth rate of -4.4% but still a deterioration from a 0.2% decline over 12 months.
Two months into the second quarter (quarter-to-date), retail sales are falling at a 3.7% annualized pace. (…)
Over three months the German retail sales volume is falling at a 12% annual rate (…). In the quarter-to-date, German volumes are down at a 17.6% annual rate (…).
US, Allies Discuss Capping Russian Oil at $40-$60 a Barrel to Cut War Financing
(…) At the summit in Germany on June 28 leaders agreed to explore options to cap prices by banning insurance and transportation services needed to ship Russian crude and petroleum products unless the oil is purchased below an agreed price. (…)
The range spans from what is believed to be Russia’s marginal cost of production and the price of its oil before the Feb. 24 invasion of Ukraine, the people said. The Biden administration considers a cap of $40 to be too low, two of the people said. The aim is to cut Moscow’s revenue for its war in Ukraine but the risk is that poorly executed measures would lead to a spike in oil prices. (…)
In Voyager Bankruptcy, Crypto Trader Alameda Is Creditor, Shareholder and Borrower Alameda Research provided emergency credit lines to the now-bankrupt crypto lender, in which it owned a minority stake. Bankruptcy filings show Alameda was also a customer.
(…) Alameda “seems to be wearing every possible hat in Voyager’s bankruptcy,” as a creditor, shareholder and borrower, said Georgetown Law professor Adam Levitin. “There is a general phenomenon of a lot of recycled capital within crypto, and this is an example of that.” (…)
Mr. Bankman-Fried’s other company, the cryptocurrency exchange FTX, has backstopped another crypto lender, BlockFi, to stave off the crypto equivalent of a bank run. (…)
Many of Voyager’s own investments as a crypto lender were in the form of loans to other crypto companies. (…)
Beijing Rolls Out China’s First Ever Covid Vaccine Mandate
(…) The city will require live performances, entertainment venues such as movie theaters, museums and gyms, as well as training and tutoring locations, to restrict entry to people who are vaccinated, Li Ang, deputy director at the Beijing Municipal Health Commission, told reporters at a briefing Wednesday.
The requirement will also apply to medical staff, people working in community service operations, home furnishing operators, express delivery providers and conference attendees. They’ll need to have received a booster shot to continue as normal, Li said. There will be exemptions for people who don’t qualify for vaccination. (…)
Beijing’s elderly vaccination rate is above 80%, while Shanghai lags behind at 70%. Nearly 90% of the country’s total 1.4 billion population are fully vaccinated with homegrown shots.