InvestMacro

By Christopher Decker, University of Nebraska Omaha 

The 9.1% increase in U.S. consumer prices in the 12 months ending in June 2022, the highest in four decades, has prompted many sobering headlines.

Meanwhile, annual inflation in Germany and the U.K. – countries with comparable economies – ran nearly as high: 7.5% and 8.2%, respectively, for the 12 months ending in June 2022. In Spain, inflation has hit 10%.

It might seem like U.S. policies brought on this predicament, but economists like me doubt it because inflation is spiking everywhere, with few exceptions. Rates averaged 9.65% in the 38 largely wealthy countries that belong to the Organization for Economic Cooperation and Development through May 2022.

What revved up those price increases starting in early 2021?

Scarcity put pressure on prices everywhere

When the COVID-19 pandemic began, demand for computers and other high-tech goods soared as many people switched from working in offices to clocking in at home.

Computer chip manufacturers struggled to keep up, leading to chip shortages and higher prices for a dizzying array of devices and machines requiring them, including refrigerators, cars and smartphones.

It’s not just chips. Many of the goods Americans consume, such as cars, televisions and prescription drugs, are imported from all corners of the world.

Supply chain strains

On top of problems tied to supply and demand changes, there have been major disruptions to how goods move to manufacturers and then onto consumers along what’s known as the supply chain.

Freight disruption, whether by ship, train or truck, has interfered with the delivery of all sorts of goods since 2020. That’s caused the cost of shipping goods to rise sharply.

These massive shipping disruptions have exposed the disadvantages of the popular just-in-time practice for managing inventory.

By keeping as little of the materials needed to make their products on hand, companies become more vulnerable to shortages and transportation snafus. And when manufacturers are unable to make their products quickly, shortages occur and prices surge.

This approach, especially when it involves the reliance on far-flung suppliers, has left businesses much more susceptible to market shocks.

Labor complications

The beginning of the pandemic also sent shock waves through labor markets with lasting effects.

Many businesses either fired or furloughed large numbers of workers in 2020. When governments began to relax restrictions related to the pandemic, many employers found that significant numbers of their former workers were unwilling to return to work.

Whether those workers had chosen to retire early, seek new jobs offering a better work-life balance or become disabled, the results were the same: labor shortages that required higher wages to recruit replacements and retain other employees.

Again, all of these dynamics are occurring globally, not just in the U.S.

War in Ukraine compounded these woes

Russia’s war on Ukraine, which began officially on Feb. 24, 2022, has also exacerbated inflation by interfering with the global supply of fuels and grains.

The conflict’s effects are reverberating around the globe and fueling inflation.

Russia is the world’s second-largest exporter of crude oil. Sanctions against Russian imports, combined with Russia halting oil shipments to European countries in retaliation, has led to disruptions in the global oil market.

As Europe buys more oil from the Middle East, demand for oil from that region increases, prompting price increases. Crude prices jumped from $101 per barrel in late February 2022, to $123 a month later. Prices stayed high for several months but by late July were around $100 a barrel again.

Food prices have increased substantially in the U.S. and elsewhere, partly due to this conflict. Ukraine possesses some of the most fertile soil in the world and is the third-largest exporter of corn.

Russia’s destruction of Ukrainian crops and its blockade of Ukrainian exports have led to significant price increases worldwide for agricultural commodities.

How will the world respond?

Support for globalization and international trade has waned in recent years. Given supply chain disruptions and the war in Ukraine fueling inflation, this trend will likely continue.

However, as an economist, I believe the benefits of free and open trade still outweigh current challenges.

In my view, there isn’t anything fundamentally wrong with the globalization that cannot be fixed. But, like quelling inflation and alleviating supply chain bottlenecks, it will take time.

About the Author:

Christopher Decker, Professor of Economics, University of Nebraska Omaha

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By Meredith Oyen, University of Maryland, Baltimore County 

U.S. House Speaker Nancy Pelosi arrived in Taiwan on Aug. 2, 2022 – a highly controversial trip that has been strongly opposed by China.

Such is the sensitivity over the island’s status that even before Pelosi’s plane touched down in the capital of Taipei, mere reports of the proposed trip prompted a warning by China of “serious consequences.” In the hours before she set foot on the island, Chinese fighter jets flew close to the median line separating Taiwan and China, while Chinese foreign minister Wang Yi commented that U.S. politicians who “play with fire” on Taiwan would “come to no good end”.

For it’s part, the U.S. has distanced itself from the visit. Prior to the trip President Joe Biden said it was “not a good idea.”

As someone who has long studied the U.S.‘s delicate diplomatic dance over Taiwan, I understand why this trip has sparked reaction in both Washington and Beijing, given the current tensions in the region. It also marks the continuation of a process that has seen growing U.S. political engagement with Taiwan – much to China’s annoyance.

Cutting diplomatic ties

The controversy over Pelosi’s visit stems from the “one China” policy – the diplomatic stance under which the U.S. recognizes China and acknowledges Beijing’s position that Taiwan is part of China. The policy has governed U.S. relations with Taiwan for the last 40-plus years.

In 1979, the U.S. abandoned its previous policy of recognizing the government of Taiwan as that of all of China, instead shifting recognition to the government on the mainland.

As part of this change, the U.S. cut off formal diplomatic ties with Taiwan, with the U.S. embassy in Taiwan replaced by a nongovernmental entity called the American Institute in Taiwan.

The institute was a de facto embassy – though until 2002, Americans assigned to the institute would have to resign from U.S. State Department to go there, only to be rehired once their term was over. And contact between the two governments was technically unofficial.

As the government in Taiwan pursued democracy – starting from the lifting of martial law in 1987 through the first fully democratic elections in 1996 – it shifted away from the assumption once held by governments in both China and Taiwan of eventual reunification with the mainland. The government in China, however, has never abandoned the idea of “one China” and rejects the legitimacy of Taiwanese self-government. That has made direct contact between Taiwan and U.S. representatives contentious to Chinese officials.

Indeed, in 1995, when Lee Teng-hui, Taiwan’s first democratically elected president, touched down in Hawaii en route to Central America, he didn’t even set foot on the tarmac. The U.S. State Department had already warned that the president would be refused an entry visa to the U.S., but had allowed for a brief, low-level reception in the airport lounge during refueling. Apparently feeling snubbed, Lee refused to leave the airplane.

Previous political visits

Two years after this incident came a visit to Taiwan by then-House Speaker Newt Gingrich.

Similarly to the Pelosi visit, the one by Gingrich annoyed Beijing. But it was easier for the White House to distance itself from Gingrich – he was a Republican politician visiting Taiwan in his own capacity, and clearly not on behalf of then-President Bill Clinton.

Pelosi’s visit my be viewed differently by Beijing, because she is a member of the same party as President Joe Biden. China may assume she has Biden’s blessing, despite his comments to the contrary.

Asked on July 20 about his views on the potential Pelosi trip, Biden responded that the “military thinks it’s not a good idea right now.”

The comment echoes the White House’s earlier handling of a comment by Biden in which he suggested in May 2022 that the U.S. would intervene “militarily” should China invade Taiwan. Officials in the Biden administration rolled back the comment, which would have broken a long-standing policy of ambiguity over what the U.S. would do if China tried to take Taiwan by force.

Similarly with Pelosi, the White House is distancing itself from a position that suggests a shift in U.S.-Taiwanese relations following a period in which the U.S. had already been trying to rethink how it interacts with Taiwan.

Shifting policy?

In 2018, Congress passed the bipartisan Taiwan Travel Act. This departed from previous policy in that it allowed bilateral official visits between the U.S. and Taiwan, although they are still considered to be subdiplomatic.

In the wake of that act, Donald Trump’s Health and Human Services secretary, Alex Azar, became the highest-ranking U.S. official to visit Taiwan since 1979. Then in 2020, Keith Krach, undersecretary for economic growth, energy and the environment, visited Taiwan.

And in April 2022, a U.S. congressional delegation visited Taiwan. Pelosi herself was reportedly due to visit the island that same month, but canceled after testing positive for COVID-19.

Each of these visits has provoked angry statements from Beijing.

A high-profile visit – even one without the public backing of the White House – would signal support to the island at a time when the invasion of Ukraine by Russia has raised questions over the international community’s commitment to protect smaller states from more powerful neighbors.

Meanwhile, the erosion of democracy in Hong Kong has undermined China’s commitment to the idea of “one nation, two systems.” The principle, which allowed Hong Kong to maintain its economic, political and social systems while returning to the mainland after the end of British rule, had been cited as a model for reunification with Taiwan. The Chinese Communist Party also plans to hold its 20th congress in the coming months, making the timing sensitive for a Taiwan visit from a high-profile U.S. political figure such as Pelosi.

Editor’s note: This is an updated version of an article originally published on July 26, 2022.

About the Author:

Meredith Oyen, Associate Professor of History and Asian Studies, University of Maryland, Baltimore County

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By JustForex

According to the latest ISM report, economic activity in the US manufacturing sector rose in July, with the economy posting its 26th consecutive month of growth. But it should be noted that there is a downward trend in growth, and the PMI indicator is approaching the level of 50. Going below 50 is usually a harbinger of recession.

At the close of trading yesterday, the Dow Jones (US30) decreased by 0.14%, and the S&P 500 (US500) lost 1.28%. The NASDAQ Technology Index (US100) was down by 1.13% on Monday.

Twitter (TWTR) lost about 2%, even as Greenlight Capital announced a new stake in the social media giant, betting that the latter will emerge victorious in a legal battle with Elon Musk to force the billionaire to fulfill his $44 billion deal. Boeing (BA) shares jumped by 6% after reports that the Federal Aviation Administration cleared the maker to resume delivery of the 787 Dreamliner.

Companies reporting today include AMD (AMD), Caterpillar (CAT), PayPal Holdings Inc (PYPL), Starbucks (SBUX), Gilead (GILD), Airbnb (ABNB), Marriott Int (MAR), Uber Tech (UBER), Ferrari NV (RACE), Electronic Arts (EA), and others.

On the political front, US House Speaker Nancy Pelosi is expected to visit Taiwan as part of her tour of Asia, despite hostile threats from China. This adds significantly to the nervousness in the financial markets.

Stock markets in Europe were mostly down on Monday. German DAX (DE30) decreased by 0.03%, French CAC 40 (FR40) lost 0.18%, Spanish IBEX 35 (ES35) was 0.87% lower, British FTSE 100 (UK100) was 0.13% lower.

European manufacturing PMI dipped below the level of 50 in July. This usually means that a country is approaching a recession. It is a preliminary and rough indicator, but the statistics show that a drop of 50 triggers recessive processes in the country. The Central Bank has begun to work toward easing monetary policy. In Spain, the Index fell from 52.6 to 48.7, Italy from 50.9 to 48.5, France from 49.6 to 49.5, Germany from 52 to 49.3, and the overall Eurozone PMI fell from 52.1 to 49.8. With the ECB just starting to tighten monetary policy and raise interest rates, Europe will slowly deepen into recession. Winter will not be easy for Europe.

Oil is down nearly 5% due to negative Chinese data. Chinese factory activity declined in July amid new blockages related to COVID. China is the world’s largest importer of crude oil. OPEC+, Organization of Petroleum Exporting Countries, will meet Wednesday to decide on September production quotas for the group’s members. Analysts believe that OPEC+, which includes 23 countries, will likely leave production unchanged and only raise it slightly in September. Most importantly, OPEC+ should not cut production at this point.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) gained 0.69%, Hong Kong’s Hang Seng (HK50) ended down by 0.05%, while Australia’s S&P/ASX 200 (AU200) was up by 0.69%.

Australia’s Central Bank raised its interest rate by 50 basis points to 1.85% and noted further tightening. The Bank said in a statement that it attaches great importance to getting inflation back into the 2-3 percent range over time while keeping the economy stable. The outlook for global economic growth has been worsened by pressure on real income due to higher inflation, tighter monetary policy in most countries, Russia’s invasion of Ukraine, and COVID containment measures in China.

Japan’s planned record minimum wage hike paves the way for sustained GDP growth. Japan’s average minimum wage is rising at a record pace this year. The government said Tuesday, a positive development for Prime Minister Fumio Kishida’s efforts to protect households from global inflation. Kishida expects the increase to contribute to his flagship policy of distributing wealth to the broader population to put Japan’s economy on a sustainable recovery path.

S&P 500 (F) (US500) 4,118.63 −11.66 (−0.28%)

Dow Jones (US30) 32,798.40 −46.73 (−0.14%)

DAX (DE40) 13,479.63 −4.42 (−0.033%)

FTSE 100 (UK100) 7,413.42 −10.01 (−0.13%)

USD Index 105.41 −0.49 (−0.47%)

• – Australia RBA Interest Rate Decision (m/m) at 07:30 (GMT+3);
• – Australia RBA Rate Statement (m/m) at 07:30 (GMT+3);
• – Switzerland Manufacturing PMI (m/m) at 10:30 (GMT+3).

By JustForex

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By JustForex

The US Personal Consumer Expenditures (PCE) inflation rate, closely monitored by the Fed, is at its highest since January 1982. The PCE increased to 6.8% in June. The core PCE (which excludes food and fuel prices) was up 4.8% from a year ago and up 0.1% from May. The Employment Cost Index, another figure that Fed policymakers keep a close eye on, rose by 1.3% in the second quarter. The Index added 5.1% in 12 months, a record for a series of data tracked since 2002. Markets expect the Fed to raise rates another 0.5% in September, according to the FedWatch CME Group tracker. However, the probability of a larger three-quarter-point hike rose to 38% Friday morning.

As the stock market closed Friday, the Dow Jones Index (US30) increased by 0.97% (+2.80% for the week, +6.73% for the month ), and the S&P 500 Index (US500) added 1.42% (+4.15% for the week, +9.11% for the month). The Technology Index NASDAQ (US100) gained 1.88% on Friday (+4.67% for the week, +12.35% for the month).

Equity markets in Europe were mostly up on Friday. German DAX (DE30) added 1.52% (weekly result +2.25%, monthly result +5.24%), French CAC 40 (FR40) grew by 1.72% (weekly result +4.03%, monthly result +8.72%), Spanish Index IBEX 35 (ES35) increased by 0.88% (+1.69% for the week, -0.24% for the month), British FTSE 100 (UK100) gained 1.06% (+2.02% for the week, +3.55% for the month).

Inflation in the Eurozone broke another record and rose to 8.9% in July (8.6% in June). The energy price boom continues, and the geopolitical factors behind it show no signs of abating. Analysts expect gas supplies from Russia to remain very limited as winter approaches, putting upward pressure on energy prices. In Germany, the government recently decided to impose an energy tax on consumers starting in October. This means that inflation in Germany could rise above 10%.

Eurozone GDP growth of 0.7% QoQ was unexpectedly strong. Experts had predicted a 0.5% growth, and the consensus was even more pessimistic. The most substantial increase was in Spain (+1.1%), where GDP levels are still below pre-pandemic levels. Analysts expect Spain to benefit from a rebound in foreign tourism this summer and show positive growth numbers in the coming quarters, even if very high inflation hurts households in Spain more than in many other Eurozone countries. Growth was also strong in France (+0.5%) and Italy (+1.0%). Data from France showed that while consumption remained weak, fixed investment and exports supported growth. In Germany, GDP was unchanged from January-March. Germany was one of the countries hit hardest by high energy prices and problems in global supply chains, so the weak growth figures were not a surprise.

The media are reporting on armed clashes on the Serbian-Kosovo border. The Serbian army is on high alert, and the Serbian presidential party is already hinting at “denazification.” Serbia is an ally of Russia, and Kosovo seeks EU and NATO membership. Serbia is behaving very much like Russia before the Russians attacked Ukraine.

Asian markets traded higher last week. Japan’s Nikkei 225 (JP225) added 0.38% for the week (+7.19% for the month), Hong Kong’s Hang Seng (HK50) lost 1.75% last week (-7.67% for the month), and Australia’s S&P/ASX 200 (AU200) was up by 2.26% for the week (monthly result +6.20%).

The situation between Taiwan and China is escalating. Under the guise of exercises, China is redeploying military equipment in the province of Fujian, which is located only 180 kilometers from Taiwan. The transfer of military equipment began just after a Thursday conversation between the US president and China. US Speaker Pelosi’s planned visit to Taiwan provoked an extremely negative reaction from China, which threatened the US with unpredictable consequences, including that the Chinese People’s Liberation Army would shoot down the US speaker’s plane.

The Japanese government will not impose a cap on the defense budget request for the next fiscal year, stressing its determination to increase spending to counter China’s military assertiveness. The government will also allocate about 4.4 trillion yen ($33.12 billion) to Kishida’s “new capitalism” program, which aims to invest in green and digital transformation areas.

After more than two years, New Zealand is fully opening its borders and welcoming all international travelers. According to the New Zealand Ministry of Health, travelers need a rapid antigen test on the day of arrival and a second test on the fifth or sixth day of their trip. Masks are not required outdoors, but they are required indoors.

In the commodities market, natural gas (+27.52%) and palladium (+9.09%) futures showed the biggest gains in July. Gasoline futures (-17.24%), wheat (-12.72%), lumber (-10.06%), Brent oil (-10.55%), WTI oil (-10.46%), corn (-6.85%), sugar (-5.13%), copper (-4.92%), and coffee (-4.69%) showed the biggest drops in July.

S&P 500 (F) (US500) 4,130.29 +57.86 (+1.42%)

Dow Jones (US30) 32,845.13 +315.50 (+0.97%)

DAX (DE40) 13,484.05 +201.94 (+1.52%)

FTSE 100 (UK100) 7,423.43 +78.18 (+1.06%)

USD Index 105.83 −0.52 (−0.49%)

• – Japan Manufacturing PMI (m/m) at 03:30 (GMT+3);
• – China Caixin Manufacturing PMI (m/m) at 04:45 (GMT+3);
• – German Retail Sales (m/m) at 09:00 (GMT+3);
• – Spanish Manufacturing PMI (m/m) at 10:15 (GMT+3);
• – Italian Manufacturing PMI (m/m) at 10:45 (GMT+3);
• – French Manufacturing PMI (m/m) at 10:50 (GMT+3);
• – German Manufacturing PMI (m/m) at 10:55 (GMT+3);
• – Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+3);
• – UK Manufacturing PMI (m/m) at 11:30 (GMT+3);
• – US ISM Manufacturing PMI (m/m) at 17:00 (GMT+3).

By JustForex

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By JustForex

On Thursday, the S&P 500 rose after an unexpected slowdown in the US economy, sparking optimism that the Federal Reserve will be forced to revise the pace of rate hikes downward. As the stock market closed yesterday, the Dow Jones Index (US30) increased by 1.03%, and the S&P 500 (US500) added 1.21%. Technology Index NASDAQ (US100) gained 1.08% yesterday.

According to the US Commerce Department, the economy decreased by 0.9% in the second quarter (with an estimate of +0.5%). It is the second quarter of contraction, pushing the economy into a technical recession. Analysts at Morgan Stanley note that the Fed will have to cut the pace of rate hikes to 50 bps in September, but the risks of a rate hike remain as inflation is not slowing. Other economic data showed that initial jobless claims fell by 5,000 to 256,000 for the week.

Amazon (AMZN) stock jumped more than 10% in extended trading Thursday after the report was released. The tech giant missed earnings expectations, but revenue for the quarter was up 7% from a year ago. On Thursday, shares of Intel (INTC) fell more than 8% after the report was released. Experts saw a deterioration in their Q3 outlook. Shares of Roku (ROKU) fell by 26% due to a weak report and a poor Q3 outlook. Shares of Apple (AAPL) added 3% after Q2 earnings beat estimates.

Exxon Mobil (XOM), Procter&Gamble (PG), Chevron (CVX), AbbVie (ABBV), AstraZeneca ADR (AZN), Colgate-Palmolive (CL), and others report today.

Yesterday, equity markets in Europe were mostly up. German DAX (DE30) gained 0.88%, French CAC 40 (FR 40) jumped by 1.30%, Spanish IBEX 35 (ES35) fell by 0.49%, British FTSE 100 (UK100) closed on the plus side 0.04%.

Europe’s largest oil companies Shell and Total Energies extended their share buybacks. It happened after second-quarter earnings surpassed the previous quarter’s already recorded high on the back of a surge in oil, gas, and petroleum product prices.

Preliminary data on inflation in Germany showed a 0.9% increase in consumer prices over the past month. Thus, annual inflation in Germany is estimated at 7.6%. The main reason for the price increase is the jump in energy prices after Russia invades Ukraine.

Oil is stable as the market weighs limited supply amid fears of a recession. Investors’ attention has now shifted to the next OPEC meeting next week.

Gold and silver prices have risen over the past few days amid a decline in the US Dollar Index and US government bond yields. But it should be noted that the decline of the dollar is temporary. The US Federal Reserve needs to reduce the pace of interest rate hikes to prevent sending the US economy into recession. But the rate hikes and the Fed’s balance sheet cuts continue, which is negative for the precious metals.

Asian stocks were mostly up yesterday. Japan’s Nikkei 225 (JP225) gained 0.36%, Hong Kong’s Hang Seng (HK50) decreased 0.23% and Australia’s S&P/ASX 200 (AU200) was up 0.97% on the day.

The latest economic data showed that Japan’s core Tokyo Consumer Price Index rose from 2.1% to 2.3% annually. The unemployment rate remained at 2.6%. Retail sales for June increased by 1.5%, while the Industrial Production Index added 8.9% last month, while a 7.5% decline was expected.

China will step up efforts to stabilize foreign trade in the second half of the year, the Commerce Ministry said on Friday.

S&P 500 (F) (US500) 4,072.39 +48.78 (+1.21%)

Dow Jones (US30) 32,529.63 +332.04 (+1.03%)

DAX (DE40) 13,282.11 +115.73 (+0.88%)

FTSE 100 (UK100) 7,345.25 −2.98 (−0.041%)

USD Index 106.25 −0.20 (−0.19%)

• – Japan Tokyo Core CPI (m/m) at 02:30 (GMT+3);
• – Japan Industrial Production (m/m) at 02:30 (GMT+3);
• – Japan Unemployment Rate (m/m) at 02:30 (GMT+3);
• – Japan Retail Sales (m/m) at 02:50 (GMT+3);
• – Eurozone French GDP (q/q) at 08:30 (GMT+3);
• – Switzerland Retail Sales (m/m) at 09:30 (GMT+3);
• – Eurozone French Consumer Price Index (m/m) at 09:45 (GMT+3);
• – Eurozone Spanish GDP (q/q) at 10:00 (GMT+3);
• – Eurozone Spanish Consumer Price Index (m/m) at 10:00 (GMT+3);
• – Eurozone German Unemployment Rate (m/m) at 10:55 (GMT+3);
• – Eurozone German GDP (q/q) at 11:00 (GMT+3);
• – Eurozone Italian Consumer Price Index (m/m) at 12:00 (GMT+3);
• – Eurozone GDP (q/q) at 12:00 (GMT+3);
• – Eurozone Consumer Price Index (m/m) at 12:00 (GMT+3);
• – Canada GDP (m/m) at 15:30 (GMT+3);
• – US PCE Price index (m/m) at 15:30 (GMT+3);
• – US Chicago PMI (m/m) at 16:45 (GMT+3);
• – US Michigan Consumer Sentiment (m/m) at 17:00 (GMT+3).

By JustForex

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By Arabinda Basistha, West Virginia University 

The U.S. Federal Reserve hiked its benchmark interest rate by a further three-quarters of a percentage point on July 27, 2022.

The jump was expected by most economists, although some had thought the central bank would go further in its attempts to put the brakes on soaring inflation and impose a full point increase.

The Conversation asked Arabinda Basistha, an economist at West Virginia University, to cast an eye over the Fed’s announcement and provide three key takeaways about what it tells us about the economy and future monetary policy.

1. More hawkish on monetary policy

On the surface, the headline decision to raise the interest rate by three-quarters of a percentage point is very much in line with what was expected. But a careful reading of the accompanying statement by the rate-setting Federal Open Market Committee (FOMC) reveals a slightly more hawkish Fed – one that’s more willing to act more aggressively in attempting to calm inflation – than in the last such meeting in June, when it likewise raised rates by three-quarters of a percentage point.

On that occasion, the vote was not unanimous – Kansas City Fed President Esther George opted to go for a half-point raise but was outvoted by colleagues who wanted the more aggressive 0.75% hike in a bid to bring down inflation.

But this time the vote was unanimously in favor of the three-quarter point rise, an indication that the Fed thinks it needs to act more decisively in the face of stubborn cost of living increases.

A notable change in the FOMC statement was the removal of any reference to supply chain disruptions due to COVID-19 in China. That line was in June’s statement, so its absence this time may indicate an easing of the supply chain issues that have contributed to inflation hitting a 40-year high.

That aside, Fed Chairman Jerome Powell stuck a downbeat note on inflation in the U.S., acknowledging in a news conference accompanying the announcement that June’s Consumer Price Index hitting 9.1% was “worse than expected.”

2. Expect a further rate hike in September

There is now a clear indication that that the FOMC will impose another rate hike when it meets in September. Powell noted in the news conference that another 0.75 percentage point rise in September “could be appropriate.”

At the same time, he acknowledged that with the latest increase, the Fed’s rate was pretty much in line with what economists call the “neutral” rate of interest – that is, a rate which neither stimulates the economy nor slows it down. The “neutral rate” is assumed to be around 2.5%; the latest FOMC hike puts the Feds’ policy rate up to a range of 2.25% to 2.5%.

So if there were to be another fairly sharp rise in the benchmark interest rate in September, it would push the Fed rate above the neutral rate – a move that would restrict economic growth. Again, this is an indication that the Fed is striking a more hawkish tone on monetary policy.

Powell did mention that a more moderate rate rise in September is possible, but that will likely depend on there being clear data showing price stabilization and an overall softening of the labor market. The job market has been strong for a while, with healthy monthly gains. The Fed will be looking for a decrease in the current high number of job vacancies, along with lower wage inflation, to signal a softening labor market before it can ease back on aggressive rate hikes.

3. Economic output is slowing, but no recession (yet)

In the statement accompanying the FOMC rate decision, the Fed noted that recent data showed “spending and production have softened.” Powell expanded on that a little, noting that business fixed investment – that is, how much companies spend on things like machines or factories – had gone down.

This acknowledgment that expenditure is softening wasn’t in June’s statement and is a clear sign that Fed officials believe the economy is slowing down, something Powell acknowledged. Yet at the same time, the Fed chair said the strength of the labor market indicated robust overall demand.

As such, it would seem Powell does not see the U.S. heading into recession, but rather, there will be some slowing down of the economy throughout the second half of this year.

About the Author:

Arabinda Basistha, Associate Professor of Economics, West Virginia University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By JustForex

The US Federal Reserve yesterday raised interest rates by 75 basis points and confirmed that further increases would be appropriate to contain high inflation, which is putting pressure on global economic activity. The Fed said that some parts of the economy, such as spending and production, have weakened. However, there has been significant job growth in recent months, and the unemployment rate remains low. At a press conference following the monetary policy announcement, Fed Chairman Jerome Powell supported the idea that the central bank would hold another rate hike in September. However, he said that a slower pace of increases might be needed to give the Fed time to evaluate the implications. It is positive for the market, as the peak of the Fed’s hawkish mood has passed. As the stock market closed yesterday, the Dow Jones Index (US30) increased by 1.37%, and the S&P 500 Index (US500) added 2.62%. Technology Index NASDAQ (US100) jumped by 4.06% yesterday.

Experts believe the Fed’s policy measures to rein in inflation seem to be having the desired effect as recent data and quarterly reports from consumer demand-sensitive sectors, including retail, have revealed fears of slowing economic growth. But many fear that in its fight against inflation, the Fed could slow the economy too much, avoid a so-called “soft landing,” and tilt the economy into recession.

Microsoft shares increased by 6.7% after forecasting double revenue growth. Alphabet shares jumped by 7.7% on the report. The company reported better-than-expected sales of Google Ads Search, easing fears of a slowing advertising market. Companies reporting today include Apple (AAPL), Amazon.com (AMZN), Mastercard (MA), Pfizer (PFE), Merck&Co (MRK), Shell ADR (SHEL), Intel (INTC), Baidu (BIDU) and others.

Most Gulf central banks raised their key interest rates by three-quarters of a percentage point Wednesday, following the US Federal Reserve, as their currencies are pegged to the dollar. The Central Bank of Kuwait, the only one of the six Gulf Cooperation Council (GCC) countries that peg its currency to a basket, not just the dollar, raised its key discount rate by 25 basis points to 2.5%.

Equity markets in Europe closed yesterday in green territory. German DAX (DE30) gained 0.53% on Wednesday, French CAC 40 (FR 40) jumped by 0.75%, Spanish IBEX 35 (ES35) added 0.68%, British FTSE 100 (UK100) closed in plus 0.57%.

Rising inflation and concerns over low natural gas supply combined with the risk of recession caused consumer sentiment in the euro area to plummet to record lows. The main reasons for the sharp deterioration in confidence are primarily related to the Russian invasion of Ukraine. Firstly, because of fears of low natural gas supply. Secondly, fears of recession, as the war has triggered inflation, especially in energy and commodities. In addition, investors are concerned about the political uncertainty in Italy and the struggle for the position of Prime Minister in the UK.

Oil rose more than $2 on Wednesday as a report of lower US inventories, and reduced Russian gas supplies to Europe offset fears of lower demand and a US interest rate hike. US crude reserves were down by 4.5 million barrels last week as exports rose to a record high due to a significant discount in US crude against the international benchmark Brent, the Energy Information Administration said.

The gas market also remains tight. Just days after Europeans breathed a sigh of relief when Russia’s Gazprom announced it would resume supplies through its Nord Stream 1 pipeline, it announced Monday that flows would be cut again. The announcement, in which Gazprom said it would repair a turbine along the pipeline, was met with disbelief and condemnation in Europe. The move will reduce gas flows to Germany by up to 20% of its capacity. Germany, the region’s largest economy and a traditional growth driver, has particular cause for concern. Germany is heavily dependent on Russian gas and is sliding into recession. Since Russia is under a slew of international sanctions in response to its war with Ukraine, gas is one of the weapons Russia uses against Europe. As a result, natural gas prices continue to rise significantly. Analysts predict a harsh winter for Europe if the situation does not change.

On Thursday, Asian stocks showed cautious gains as investors sensed a possible slowdown in the pace of rate hikes in the United States. Japan’s Nikkei 225 (JP225) gained 0.22%, Hong Kong’s Hang Seng (HK50) decreased by 1.13%, while Australia’s S&P/ASX 200 (AU200) was up 0.23% on the day.

S&P 500 (F) (US500) 4,023.61 +102.56 (+2.62%)

Dow Jones (US30) 32,197.59 +436.05 (+1.37%)

DAX (DE40) 13,166.38 +69.45 (+0.53%)

FTSE 100 (UK100) 7,348.23 +41.95 (+0.57%)

USD Index 107.22 +0.73 (+0.69%)

• – Australia Retail Sales (m/m) at 04:30 (GMT+3);
• – US GDP (q/q) at 15:30 (GMT+3);
• – US Treasury Sec Yellen Speaks at 15:30 (GMT+3);
• – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
• – US Natural Gas Storage (w/w) at 17:30 (GMT+3).

By JustForex

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.