June 10, 2022Money Education Financial literacy Economy Good reads Professionals Commentary In the news News
What's Happening Today - June 10
It’s all about inflation and the rates today. In case you’re interested in a quick central bank summary, you came to the right place:
U.S. Fed – “We're hiking by 50bps at next few meetings and want to get to neutral by year-end"
Bank of Canada - "Hiking will continue and the rate needs to get to upper end of neutral range, and maybe above there."
European Central Bank - “We need to tighten at next few meetings, and then gradually over time". Gradual is code for 25bps.
Here in the Great Wet North, a further solid rise in employment, decline in the jobless rate, and sharp acceleration in wage growth places more pressure on the Bank of Canada to continue raising interest rates. Employment rose by 40K in May, modestly ahead of the 27.5K expected by the consensus. The composition of job gains showed all of hiring coming in full time (135K) positions, albeit also in public sector (+108K) rather than private sector positions. By sector, gains were led by services, including accommodation & food, and wholesale & retail, but employment was down in goods producing areas due to a drop in manufacturing. With the participation rate unchanged, the unemployment rate fell one tick to another record low of 5.1%. Wage growth for permanent employees accelerated sharply to 4.5% year-over-year (consensus 3.8%, prior 3.4%), although that was partly attributable to a weak month for average earnings from a year ago (when low wage services were rehiring after lockdown measures were lifted) dropping out of the year-over-year calculation. The solid data and standout wage figure may have investors once again increasing the odds of a 75bp move by the Bank at its next meeting, seeing bond yields rise, although we do have another employment report to be released before that decision is made. Interestingly, employers are now looking to raise their pay standards in order to attract and retain employees. Most of the big banks have already committed to bringing their pay scales up in the coming months.
Down south, inflation was red-hot in the U.S. in May, as the jump in gasoline prices combined with pressure in food prices to drive a 1.0% monthly advance in total CPI, above the consensus expectation of 0.7%. That left annual inflation at 8.6% vs. 8.3% expected, a three tick acceleration from April. Excluding energy and food prices, core inflation was also hotter than expected, as prices rose by 0.6% month-over-month (versus 0.5% month-over-month expected). Shelter was the single largest contributor to that, as that sub-index posted its largest monthly increase since 2004. Core price pressures were widespread, with some other major contributors being airfares, used and new cars, and apparel, amidst others. While that left annual core inflation two ticks slower at 6.0% (versus 5.9% expected), the deceleration was driven by base effects. Overall, this adds upside risk to our existing target for the Fed funds rate. The contribution to inflation from shelter is of key concern for the Fed given its stickiness, and with gasoline prices on a sharply higher trajectory in June, the Fed will remain on track to raise rates by 50bps at next week’s FOMC. Going forward, recall that Brainard has given us a big hint as to when the Fed will shift from 50 to 25 again. It’s all about when there’s a “consistent decline” in core prices, as opposed to a peak in year-over-year.
European equity markets are lower and becoming range-bound, led by banks losing 3% to lead losses as all sectors slid into negative territory. Bundesbank forecast that the country's economic recovery is likely to continue, but at a much more subdued pace than projected last December. Meanwhile the Bank of England is now satisfied that Britain’s big banks are no longer too big to fail, after an intensive effort to de-risk the financial system. While the growth outlook deteriorates, the United Kingdom appears on course to witness the highest inflationary backdrop across the G7. It seems that the UK faces aggressive energy price pressures, as per the rest of the continent of Europe, while service-led price growth, as per North America, remains evident. The UK is oft perceived to be seen as being halfway between Europe and North America. In terms of inflationary influences, it appears to be facing the worst of both continents. The combination of slower growth and potentially more protracted price pressures puts the Bank of England in an increasingly unenviable position. We would note that the BoE, from the May MPR, currently assumes CPI will be back at target into the second half of 2023. As median assumptions of peak inflation continue to climb, the risks of the UK witnessing stagflationary dynamics into 2023 continue to advance.
Asian markets closed mixed with Japan, Australia and most regional markets trading down, however China was mostly higher. Data showed China’s May producer price index for May gained 6.4% as compared with a year earlier while Chinese consumer inflation in May also saw an increase of 2.1% from a year ago, just below the forecasts of 2.2%.
Oil prices rose slightly to trade near three-month highs, supported by solid fuel demand in the United States.
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