Dear Friends,
During the final weeks of June, a series of significant economic events developed worldwide. One of the most impactful events was the Federal Reserve’s decision to pause rate hikes during the June Federal Open Market Committee (FOMC) meeting. Concurrently, the Bank of England raised interest rates in response to stubborn inflation in the UK. These actions sparked substantial discussions about the best path forward and the implications for the global economy.
Economy, Geopolitics, and Commodities
1. Fed Holds Rates Steady but Expects More Increases
Federal Reserve officials agreed to hold interest rates steady after ten consecutive increases but signaled they were prepared to raise rates next month if the economy and inflation don’t cool more.
New economic projections, released June 14th, 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 boost their expectations for growth and inflation.
In its post-meeting statement, the Fed implied the decision to maintain the benchmark federal funds rate in a range between 5% and 5.25% might be short-lived.
After holding the fed-funds rate near zero following the Covid-19 pandemic, the Fed had raised the rate at every meeting since March 2022 by a cumulative 5 percentage points, the most rapid series of increases since the 1980s. Officials slowed their increases this year, lifting the rate by a quarter percentage point at their past three meetings, most recently in May.
Last Wednesday’s decision not to raise rates “is a continuation of that process,” said Fed Chair Jerome Powell at a news conference. Given how much closer officials believe they are to their destination “it’s common sense to go a little slower.”
The Fed fights inflation by slowing the economy by raising rates, which causes tighter financial conditions such as higher borrowing costs, lower stock prices, and a stronger dollar.
2. CPI Report Shows Inflation Has Been Cut in Half
The Labor Department’s consumer-price index for May was released on June 13th, giving investors the latest reading on inflation. The all-items index increased by 4% for the 12 months ending May; this was the smallest 12-month increase since the period ending March 2021. The energy index decreased by 11.7% for the 12 months ending May, and the food index increased by 6.7% over the last year. So-called core consumer prices, which exclude volatile food and energy categories, climbed 5.3% in May from a year earlier, down from 5.5% in April. Economists see core prices as a better predictor of future inflation.
Core prices remain elevated in part because an earlier surge in housing-rental prices continues to show up in the inflation figures. Apartment-rent growth has since cooled significantly declining to just under 2% over the 12 months ended in May from double-digit increases a year ago. Those price changes will take pressure off inflation, but they take time to show up in inflation data due to the lag in how rent is calculated. Rising housing, used vehicle, and food prices drove inflation last month, the Labor Department said. Gasoline prices declined 5.6% in May from April, and other energy prices also dropped.
Here is what economists expect. Prices likely rose 4% from a year ago, down from 4.9% in April. Month-on-month, prices likely edged up 0.1%. Core CPI likely stood at a 5.3% annual rate in May, down from 5.5% in April. This measure excludes volatile food and energy categories.
Stocks rose on June 13th, with the S&P 500, Dow Jones Industrial Average, and Nasdaq all advancing. Treasury yields ticked up, with the 10-year note settling at its highest level since March. Fed officials have focused recently on prices for a subset of labor-intensive services by excluding food, energy, goods, and housing prices, believing that category could reveal whether wage pressures from the strong labor market are passing through to consumer prices. That category rose 0.24% in May, close to its average in the two decades before the pandemic.
3. Bank of Japan Leaves Rates Unchanged, Holding Them at Ultra-low Levels
Japan’s central bank maintained its ultra-loose monetary policy on June 20th, electing to support fragile economic growth at a time of swirling global uncertainty. The Bank of Japan held its short-term interest rate target at -0.1%, in line with economists’ expectations, and made no changes to its yield curve control policy after a two-day meeting. The Japanese yen declined after the decision, falling by as much as 0.3% to around 140.70 per U.S. dollar before paring losses. The Nikkei 225 similarly reversed earlier losses to creep higher, while 10-year Japanese government bond yields fell.
The Bank of Japan expects the world’s third-largest economy to “recover moderately around the middle of fiscal 2023” due to pent-up demand. It cautioned; however, commodity prices and a growth slowdown overseas will likely limit growth. Earlier this month, first-quarter growth in Japan was revised sharply higher to 2.7%. Japan’s core inflation rate — which stood at 3.4% in April — has been consistently above the central bank’s own 2% target for more than a year.
The Bank of Japan’s short-term interest rate target has been held at -0.1% since it first adopted negative rates in 2016 to fight chronic deflation that has plagued the Japanese economy for decades and jumpstart economic growth. It is keeping its current policy to cope with growth it still sees as fragile.
In contrast, the U.S. Federal Reserve left rates unchanged on June 14th, after 10 straight hikes, while the European Central Bank on June 15th raised its main rates to the highest levels in 22 years. The divergence points to the challenges in the global economy.
Economists have been watching for changes to the BOJ’s yield curve control policy, which aims to keep 10-year Japanese government bond yields around 0%. In December, the central bank unexpectedly widened the range for the 10-year yield target to 50 basis points above and below 0%.
4. Bank of England Outpaces Peers with Rate Rise of Half Percentage Point
The Bank of England raised its key interest rate by half a percentage point Thursday, a more aggressive rate rises than its peers as it seeks to curb the highest inflation rate in the Group of Seven wealthy countries. The move to raise the lending rate to 5%, its highest level since April 2008, follows smaller rate increases in recent weeks by the European Central Bank, the Bank of Canada, and the Reserve Bank of Australia. Last week, the Federal Reserve kept its key rate unchanged.
Across rich economies, inflation has proven tougher to tame than central banks had expected. But the U.K.’s inflation rate has proved particularly stubborn. Figures released on June 21st showed consumer prices in May were 8.7% higher than a year earlier, unchanged from April. Before the inflation data was released, economists and investors had expected a quarter-point interest-rate increase.
The core measure that excludes volatile items such as food and energy rose to its highest level in more than three decades, a contrast with the U.S. and the eurozone, where it has been falling. The big reason for that pickup was service inflation, which the BOE has said it is paying particular attention to for signs that rising wages are pushing prices higher.
The BOE said it may raise its key interest rate again in the coming months if there are fresh signs that inflation is set to stay high for longer than it expects. The central bank last month forecast that inflation would fall to its target of 2% by the end of 2024, about nine months later than it had expected at the start of the year.
With inflation staying stubbornly high, investors have priced in a number of additional rate rises. The BOE said investors expect to see its key interest rate average 5.5% over the next three years, up from 4% at the time of its May meeting. Britain’s FTSE 100 index slipped after the decision and was down 1.2% on the day. The U.K.’s 10-year government bond yield fell to 4.343% from 4.406%, while the pound wavered against the dollar.
5. Biden Announces $600 Million in Climate Investments During California Trip
In the administration’s latest effort to mitigate climate change, President Joe Biden announced Monday more than $600 million in investments for climate change resiliency projects across the country. Almost all the investment, $575 million, will go toward a National Oceanic and Atmospheric Administration project to help coastal and Great Lakes communities become more resilient to climate change impacts, such as rising sea levels, more frequent storms, and increased flooding. A total of $67 million will go toward modernizing California’s electric grid to reduce the impact of wildfires and other extreme weather events. Funding for the project comes from both the Inflation Reduction Act and Bipartisan Infrastructure Law.
The announcement comes less than a week after four major climate and environmental justice groups, including the Sierra Club, League of Conservation Voters Action Fund, NextGen PAC, and the NRDC Action Fund, announced a joint endorsement to back Biden’s re-election bid. Other environmental groups are holding off on announcing their support, citing the administration’s recent approvals of the Mountain Valley Pipeline and other fossil fuel projects.
The White House plans to host a summit later this year when the Biden administration is expected to release a new climate resilience framework to outline steps the federal government can take to make communities more resilient to climate change.
6. Grocery Prices Rose Slightly. What’s Behind the Ascent?
Prices for dozens of grocery staples, including fresh fruits and vegetables, rose in May, adding pressure to household budgets just when shoppers were hoping for a break. The Bureau of Labor Statistics reported Tuesday that supermarket food prices gained 0.1% in May from April. The culprits were products such as fruits and vegetables, which increased 1.3% in May, some meat such as ham, which rose 1.6% from the prior month, and nonalcoholic beverages such as juices, which on average gained 0.7%.
It’s the reversal of the trend in March and April when Americans’ consumer grocery bills were feeling some respite. Inflation as measured by the consumer price index showed prices in the so-called food-at-home component declining 0.3% and 0.2% in March and April, respectively. There was hope that the easing of prices in grocery aisles would give shoppers some breathing room after pulling back on their purchases of nonessentials. To be sure, there were glimmers of good news in May. Prices of eggs fell nearly 14%, while dairy and related product costs eased 1.1% from April.
Americans are still likely feeling sandwiched. The overall higher cost of eating at home has coincided with the rising cost of food bought and consumed away from home. The category measuring prices of food purchased from vending machines and restaurants gained 0.5% in May from the prior month, making dining out an increasingly costly option for households.
Food prices are typically affected by volatility in the prices of agricultural commodities as well as by labor and transportation costs. Prices of commodities have been volatile. In raw sugar-cane futures, a world benchmark for sugar prices, contracts settled as high as 27 cents a pound on May 10, the highest point in 12 years, according to Dow Jones Market Data.
Financial Markets
1. Nasdaq Ends Lower as Indexes Post Losing Week
Stocks closed down Friday after concerns that global interest-rate hikes could push the world economy into recession. Bonds rallied and oil slid. The tech-heavy Nasdaq Composite fell 1% to lead the major indexes lower.
Surveys of purchasing managers by data firm S&P Global pointed to sharper-than-expected slowdowns in the eurozone, Japan, and Australia.
Several overseas central banks raised borrowing costs in recent days to slow inflation. The Federal Reserve, meanwhile, said its inflation-fighting campaign has further to go.
In recent trading Friday:
U.S. stocks log losing week. The Dow industrials snapped a three-week winning streak, and the Nasdaq ended an eight-week streak. The S&P 500 snapped a five-week streak. All three are still up for the year.
Treasury prices rose. That pulled the yield on benchmark 10-year notes down to 3.737%, from 3.797% Thursday. European government bonds rallied, too.
Oil prices retreated. Most-active futures for Brent crude fell 0.6% to $73.88 a barrel. A Saudi Arabia-led output cut has failed to fuel a sustainable energy-market rally.
CarMax shares advanced. The gains came after the used-car retailer reported better-than-expected earnings. CarMax was the S&P 500’s top performer.
3M shares edged up. The company agreed to pay up to $12.5 billion to settle hundreds of lawsuits brought by cities that said their drinking water was contaminated.
Bitcoin held above $30,000. The cryptocurrency has rallied in recent days after BlackRock filed for a spot Bitcoin exchange-traded fund.
2. Ford Gets $9.2 Billion to Help US Catch Up with China’s EV Dominance
A deep-pocketed US government program designed to finance futuristic energy businesses is issuing a conditional $9.2 billion loan to Ford Motor Co. for the construction of three battery factories. The enormous loan — by far the biggest government backing for a US automaker since the bailouts in the 2009 financial crisis — marks a watershed moment for President Joe Biden’s aggressive industrial policy meant to help American manufacturers catch up to China in green technologies.
The new factories that will eventually supply Ford’s expansion into electric vehicles are already under construction in Kentucky and Tennessee through a joint venture called BlueOval SK, owned by the Michigan automaker and South Korean battery giant SK On Co. Ford plans to make as many as 2 million EVs by 2026, a huge increase from the roughly 132,000 it produced last year.
The three-factory buildout by BlueOval plus an adjacent Ford EV assembly unit has an estimated price tag of $11.4 billion. BlueOval was previously awarded subsidies by both state governments. That means taxpayers would be providing low-interest financing for almost all of the cost.
Ford’s cars and SUVs made with domestic batteries will also be eligible for billions of dollars in incentives embedded in the Inflation Reduction Act’s $370 billion in clean-energy funding, part of the historic climate measure narrowly passed into law about a year ago. The US government will subsidize the manufacturing of batteries, and buyers could qualify for additional tax rebates of up to $7,500 per vehicle.
The rush of incentives, government lending, and private-sector investment has led to a manufacturing boom in the wake of the IRA. More than 100 battery and electric-vehicle production projects are announced or are already under construction in the US, representing about $200 billion in total investments.
3. Janet Yellen Sees Bank Earnings Pressure, Mergers After March Crisis
Treasury Secretary Janet Yellen said more banks would probably seek to merge this year as higher interest rates and recent banking turmoil are making it more expensive for them to hang on to depositors.
Some smaller banks have said they are paying more in savings accounts after the Federal Reserve began quickly raising rates last year. Yellen said that trend has continued following the collapses of Silicon Valley Bank and Signature Bank in March, when small and midsize banks across the country saw depositors jump to larger institutions, they believed were less vulnerable. Paying higher rates for deposits is now denting those banks’ profitability, Yellen said.
Her comments are the clearest sign yet that regulators are bracing for the tumult the industry weathered earlier this year to flare up again. While Yellen and other officials guaranteed deposits at SVB and Signature Bank and took other steps to stabilize the banking system, the Fed’s rapid rate increases posed a challenge for many banks. Midsize-bank stocks were hammered earlier this year as investors worried about their viability.
Yellen said she didn’t expect a return to the same instability seen earlier in the year, but weaker second-quarter earnings could put pressure on stock prices and potentially prompt some banks to merge. Yellen didn’t name any banks she was watching. She has previously said it was possible some banks could look to buy each other.
Bank regulators have been reluctant to let big lenders buy each other recently. But some banking experts have said they would need to allow more mergers to shore up confidence in the system. Regulators seized First Republic Bank and sold the bulk of its operations to JPMorgan Chase in May. Yellen said more consolidation in the banking industry could be healthy, though she has warned against the biggest banks becoming bigger.
4. Amazon Debuts its Headquarters Complex in Virginia as it Brings Workers Back to Office
Amazon unveiled the first phase of its new headquarters complex in Virginia Thursday, a pair of gleaming, amenity-packed office towers that its leaders hope will persuade employees accustomed to working from home during the pandemic to happily return to the office.
The grand opening of the Met Park office complex in Arlington’s Crystal City neighborhood near the nation’s capital marks the biggest milestone in the headquarters project since the company announced in 2018 that it would build a second headquarters complex in northern Virginia to complement its existing headquarters in Seattle.
Initially, plans for the “HQ2” project called for Amazon to bring 25,000 jobs each to both northern Virginia and New York City. But opposition to the incentive package in New York helped derail those plans, and the Arlington complex became the sole site for HQ2.
At last Thursday’s ribbon-cutting ceremonies, Amazon emphasized its efforts to ingratiate itself to the region. The company committed hundreds of millions of dollars to help preserve affordable housing in the region, and the project includes a 2.5-acre (1.01-hectare) park, fenced dog run, and playground. Amazon even replicated its well-known banana stand from its Seattle headquarters, offering free fruit to workers and visitors.
Generally speaking, local leaders have welcomed Amazon and the high-paying jobs it has brought. Arlington County Board Chair Christian Dorsey praised the company’s willingness to partner with the county, particularly on affordable housing. Still, the changes have not been without some aggravation. Some community activists have complained about rising rent and gentrification. During construction, piledriving occurred in the first half of 2020, during the worst of the pandemic. Neighbors stuck in their homes pleaded for relief from the noise to no avail.
5. Jack Ma’s Lieutenants Return to Oversee Tough Alibaba Reboot
Alibaba Group Holding Ltd. is bringing back two of Jack Ma’s longest-serving lieutenants to try and turn around a company that’s struggled to regain its footing since Beijing’s regulatory assault against the internet sector in 2021. Yet investors remain uncertain what they can do to restore an icon of Chinese private enterprise to its former glory.
Alibaba surprised markets by declaring Eddie Wu and Joseph Tsai will replace eight-year veteran CEO Daniel Zhang at the helm. Both men are business heavyweights of their generation, credited with steering the technology and strategy that underpinned China’s erstwhile most valuable corporation — before Xi Jinping’s tech crackdown obliterated growth across swaths of the industry and nixed once-aggressive expansion plans.
Their task now is to figure out how to follow through on a landmark six-way restructuring and spinoff that Zhang unfurled just months before. The idea was to create a family of leaders in businesses from cloud computing and logistics to international commerce that could seek funding and list separately, appeasing shareholders hungry for value.
Yale alumnus Tsai, a deal-maker well-liked among investors, is likely to play a significant role in handling markets and Alibaba’s most prominent backers. A former lacrosse athlete arguably best-known in America as the owner of the Brooklyn Nets, Tsai understands the business intimately: he was right beside Ma at Alibaba’s inception in a Hangzhou lakeside apartment in 1999.
Wu, who was like Ma from the very beginning, is a lesser-known quantity. The former computer science major is credited with helping develop the company’s ad platform and the PayPal-like Alipay, now part of the Ma-backed Ant Group Co. He went on to establish a venture capital firm that manages about a 10-billion-yuan ($1.4 billion) portfolio encompassing autonomous driving and software.
In 2020, regulators cracked down on Ma and Ant Group Co. after the billionaire angered regulators with a public critique of Chinese financial regulators. Beijing began a clampdown on the private tech sphere shortly after, accusing Alibaba of monopolistic behavior before levying a record fine for the alleged violations. Alibaba shares have slumped about 70% since, a wipeout of more than half a trillion dollars of value.
The company never regained its stratospheric growth, particularly as new entrants such as Byte Dance Ltd. and PDD Holdings Inc. sapped its core business. It began to lose market share in the cloud, its other engine of growth, to state-backed rivals. Alibaba’s US-traded shares fell 3.8% Tuesday morning in New York to $88.64.
6. These SVB Depositors Got Burned—Now They’re Fighting Back
Silicon Valley Bank customers whose deposits were seized by U.S. authorities after the lender’s collapse are fighting back. Customers who held money in the bank’s Cayman Islands branch found their accounts wiped down to zero after SVB collapsed in March because a U.S. move to guarantee deposits didn’t apply to them. Their pain was compounded when they found out First Citizens Bancshares had acquired their loans from SVB—meaning they had lost their money but kept their debts.
Several firms including venture-capital funds in Hong Kong and mainland China have pushed back, filing a petition in a Cayman Islands court last week to initiate a windup procedure of the former U.S. bank’s branch there. The depositors held around $38 million in their Cayman SVB accounts, according to the petition.
The depositors hope the move will increase their chances of getting their money back from the Federal Deposit Insurance Corp., which seized their funds, according to people familiar with the matter. The petition, filed by law firm Campbells to the Cayman court on June 13, argues that it is “just and equitable” for SVB’s Cayman Islands branch to be wound up since the branch was unable to pay the debt.
The petition also asks the court to approve the appointment of official liquidators to help find ways to retrieve the funds. The liquidators will be able to investigate and keep depositors informed and ensure they are treated fairly, said Paul Kennedy, a partner at Campbell’s. A court hearing on the petition will be held on June 29, the document said.
The Cayman Islands Monetary Authority, the islands’ main financial regulator, is also considering its legal options, The Wall Street Journal previously reported. André Ebanks, the Caymans’ minister of financial services and commerce, met depositors in Hong Kong last month and told them he was working on it, people attending the meeting said.
When the FDIC took the deposits of the failed lender’s Cayman Islands branch, it informed the account holders they would be treated as general unsecured creditors in SVB’s receiverships, the depositors said. Foreign deposits weren’t covered by U.S. deposit insurance, the FDIC said, adding that they could seek compensation by filing claims by July 10th.
Sources:
(1) www.bloomberg.com
(2) www.spglobal.com
(3) www.wsj.com
(4) www.bls.gov
(5) www.barrons.com
(6) www.cnbc.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted.
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Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
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