Rate hikes ain’t over, all over the world

The Bank of England's (BOE) decision to raise UK rates by a larger than expected 50 basis points to 5%, with increases by central banks in Norway, Switzerland and Turkey, reminded traders that this tightening cycle isn’t over. Fed Chair Jerome Powell, testifying before the Senate Banking Committee, repeated that a couple of more rate hikes may be necessary this year to tame inflation. Tech stocks rebounded after yesterday’s sell off, but commodities were lower on economic demand concerns.

Bottom line – risk-off.

TODAY’S MAJOR NEWS

Tightening cycle continues

The scale of this morning’s BOE rate hike was unexpected. Fed fund futures now factor in an anticipated July rate hike, no changes to the year end, and then dropping 150 basis points or so in 2024. The market is finally taking the Fed at its word that it will not begin rate cuts until next year, but now the question is, will current rates be high enough? The market has consistently under-estimated the Fed’s commitment to the 2% inflation mandate, and the Fed has consistently under-estimated inflation stickiness.

The Fed repeatedly states that wage inflation remains their primary concern, and that wage inflation will not be tamed until we see a better balance between the number of workers seeking a job versus the number of job openings. Realistically, the Fed’s only tool to tame wage inflation is to decrease the number of job openings. However, today’s jobless numbers continue to reflect a tight jobs market with plentiful employment opportunities. On the other hand, higher rates have hit home prices and sales.

Jobless numbers continue to reflect a tight jobs market

• Continuing claims for the week ending June 10 fell 13,000 to 1.759 million, with the four-week moving average falling by 7,500 to 1.772 million
• First-time claims for unemployment benefits remained flat at 264,00 in the week ending June 17, a shade ahead of an expected 261,00
• The four-week moving average rose to 255,750 claims, up 8,500 from the previous week

Homes sales stabilize, prices fall markedly

• Existing home sales stabilized at an annualized rate of 4.30 million units in May, up slightly from 4.29 million the previous month, according to the National Association of Realtors
• Existing home sales are still down 20.4% year-on-year, and the supply of homes on the market is down 39% from pre-pandemic levels
• US home prices fall by largest amount annually since December 2011, with the median existing home price down 3.1% from a year ago
• Homeowners aren't upgrading to new homes not wanting to replace a 3% existing mortgage with a current 6% mortgage

Chicago Fed index shows economic growth slowing

• The Chicago Fed’s national activity index fell to -0.15 in May, suggesting that the economy grew at a slower than trend pace during the month
• That’s down from 0.14 the previous month, when the economy was growing above trend
• The index is constructed from 85 existing monthly indicators of national economic activity and has average value of zero when the economy is growing at a trend rate

Ukraine grain initiative ending, pressure on global supply

• Russia will withdraw from the Black Sea grain initiative in July, according to Ukraine’s Ambassador of the Ministry of Foreign Affairs Olga Trofimtseva
• Ukraine grain exports could be slashed in half for the 2023-24 marketing year due to the expected collapse of the grain initiative, the European embargo on Ukrainian products moving into Eastern Europe over land, and adaptation of producer to the economic shocks of the first year of the war

TODAY’S MAJOR MARKETS

Equity markets

• The Nasdaq Composite index bounced back, up 06.% in morning trade, with the S&P 500 up 0.2% and the broadly-based Russell 2000 down 0.7%
• Global markets were still in a bearish mood, with the DAX, FTSE 100 and Nikkei 225 indexes off 1.8%, 0.8% and 0.9%, respectively
• The VIX, Wall Street’s fear index, fall again to 13.1, highlighting how little ‘fear’ can be extracted from derivative markets opinion on cash equities

Currencies, Bonds and Crypto

• The dollar index was unchanged against a basket of currencies to 102.4 by lunchtime, recovering from morning weakness
• Euro/dollar Sterling/dollar were both 0.3% lower
• The inverted yield curve hit one percent for the first time in this cycle, with yields on 2- and 10-year Treasuries both higher at 4.79% and 3.79% respectively
• Bitcoin held recent gains at $30,057, off 0.4% after a strong recent move

Commodities

• Gold prices were 1.0% lower at $1,925 per ounce
• Crude oil prices fell 4.2% to $69.5 per barrel on rate hike fears and Chinese economic woes
• Grain and grain and oilseed markets were mostly lower on profit taking after the recent weather rally took prices into over-bought territory

Analysis by Arlan Suderman, Chief Commodities Economist ([email protected])

Market outlook by Paul Walton, Financial Writer: [email protected]