Michael Watkins
June 16, 2023
Weekly Market Update
All eyes were on the U.S. this week, as the markets tried to anticipate what the Fed would do. The annual pace of US inflation eased to its lowest level in over two years, providing some relief. However, stubborn price gains could keep pressure on the US Federal Reserve Board (Fed) to consider additional interest-rate increases. The consumer price index rose 4% in May compared to the previous year, marking a significant change from April's 4.9% annual jump and the lowest rise since March 2021.
- Inflation has decelerated significantly from its peak of 9.1% in June last year. According to the Bureau of Labor Statistics, consumer prices increased by 0.1% on a monthly basis in May.
- President Joe Biden expressed optimism, stating the report is good news for hardworking families, as it showcases progress in tackling inflation while keeping unemployment low.
- The Fed released fresh projections regarding the federal funds rate, inflation, economic growth, and unemployment. Some economists anticipate policymakers will advocate for at least one additional 25 basis-point rate rise in 2023
Although attention focused on the US Federal Reserve Board’s (Fed) decision to maintain interest rates, a separate report released on Wednesday revealed a decline in US producer prices in May, driven by a drop in gasoline costs. It could signal easing supply-side inflation. The Fed rate hikes began in March 2022 after inflation hit a four-decade high.
- Fed officials unanimously decided to pause. This leaves the federal funds rate in a target range of 5%-5.25%, but further interest-rate increases this year are still likely.
- The Fed’s statement highlighted moderate economic growth and robust jobs gains. However, the committee expects a tighter credit environment to affect hiring and inflation.
- 2023 economic growth forecast was revised up to 1% from 0.4%. The US unemployment rate is expected to be 4.1% at the end of the year compared to the previously forecasted 4.5%.
- Fed Chair Jerome Powell reemphasized the tight labour market but noted that supply and demand are showing signs of balancing more evenly.
- Long-term inflation expectations seem well-anchored. In addition, Powell said the ‘full effects of our tightening have yet to be felt.’
Looking at the global picture, recent S&P business surveys indicate a decline in new orders for manufactured goods in May, both in the US and across the eurozone. Consumers have been redirecting their spending toward services and entertainment, especially travel, leading to challenges for goods producers.
- Factories in the US and the eurozone reported a decline in new orders for manufactured goods in May as they worked through backlog orders. The Institute for Supply Management's Purchasing Managers' Index (PMI) in the US fell to 46.9, indicating a contraction for the seventh consecutive month.
- Consumers have shifted spending back to services after countries around the globe rescinded pandemic-era restrictions. Hospitality businesses in the US and Europe are ramping up for a busy summer of travel.
- Manufacturing sales in Canada fell 0.2% on a monthly basis in April, according to preliminary estimates by Statistics Canada. The final data is available on Thursday.
- China's manufacturing industry experienced a temporary improvement in May, according to the Caixin manufacturing PMI. However, recent data showed a significant decline in exports and a further contraction in imports.
A survey from the National Association of Manufacturers in the US revealed growing concerns about retaining quality workers, a weak domestic economy, and an unfavourable business climate. Around 67% of those surveyed were positive about the outlook, the lowest percentage since 2020.
The European Central Bank (ECB) proceeded with another interest-rate hike, signaling its commitment to tackling inflation a day after the US Federal Reserve paused its hiking cycle. The quarter-point rise lifted the rate to 3.5%, marking the eighth consecutive increase for the eurozone since July 2022. The ECB aims to reduce inflation from 6.1% to its target of 2%.
- The ECB's effort to tighten credit is an unprecedented response to combat inflation and restore economic stability.
- A gradual but forceful transmission of earlier rate increases is steadily influencing aspects of the economy, according to the governing council.
- While higher rates effectively fight inflation, they risk weakening the economy and potentially pushing it into a recession.
- The central bank acknowledged the short-term weakness in economic growth but anticipates improvement as inflation subsides and supply disruptions gradually ease.
- Europe's economy contracted slightly in the last quarter of 2022 and the first quarter of 2023, meeting the definition of a recession with two consecutive quarters of falling output.
- The Bank of England is set to make an interest rate decision next week, with economists expecting a 25 basis-point hike.
As the ECB maintains its aggressive stance toward combatting inflation, market participants should closely monitor the impact on the European economy and global financial markets. ECB policymakers are trying to maintain a delicate balance between taming inflation and avoiding an economic downturn.
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Source: CIBC Morning Market Brief