Fed Officials Advise Patience

For the week ending 24 May 2024

As of midday Friday, global equities were modestly lower on the week amid firmer global bond yields. From a week ago, the yield on the benchmark 10-year US Treasury note rose 7 basis points to 4.47%. The price of a barrel of West Texas Intermediate crude oil slipped nearly $2 to $77.25. Volatility, as measured by the Cboe Volatility Index (VIX), edged lower to 12.10.

MACRO NEWS

Flash PMI data send US yields higher

Preliminary purchasing managers’ indices for May from S&P Global saw improvements in both manufacturing and services sector activity. The composite index jumped to 54.4 from 51.3 in April, the highest reading for that measure in two years. The yield on the US 10-year Treasury note spiked seven basis points to 4.49% in the wake of the data as investors anticipated fewer, later rate cuts from the US Federal Reserve.

Hawkish FOMC minutes contradict dovish Powell press conference

The Fed released the minutes of the 1 May meeting of the Federal Open Market Committee on Wednesday, and the readout was a good deal more hawkish than markets expected given the dovish tone Fed Chair Jerome Powell set in the press conference that followed the meeting, during which he seemingly took rate hikes off the table. The minutes showed that “various” participants were willing to tighten more if needed. “Various” is a purposefully vague formulation in the Fed’s taxonomy, but close observers suggest it equates to approximately three to five participants, a significant portion of the 19-member FOMC. Markets are currently fully pricing in only one rate cut before the end of the year and eyeing a one in three chance of a second one. One balance, Fed speakers this week tended to suggest that patience is needed to allow restrictive monetary policy the time to restrain the economy and lower inflation.

UK prime minister calls early election

Though his Conservative Party is trailing badly in opinion polls, British Prime Minister Rishi Sunak on Wednesday unexpectedly asked King Charles III to dissolve parliament and called a general election in the United Kingdom on 4 July. Sunak isn’t required to hold an election until January. The Conservatives have been in power since 2010. Labor Party leader Keir Starmer, rather than offering a sweeping vision for the future, has said he will campaign on competence. Polling indicates that neither Sunak nor Starmer are viewed favorably by the public.

QUICK HITS

According to the Wall Street Journal, the Fed and other federal banking regulators will require smaller capital increases from large banks than they had earlier proposed as part of the Basel III endgame. The banks are likely to require an additional 10% in capital buffers, down from a proposed 20%. US banks told regulators that the larger capital increase would have forced them to discontinue a range of products and shut down businesses.

In his inaugural address on Monday, new Taiwanese President Lai Ching-te called on China to end threats and intimidation and instead work together to achieve peace and common prosperity. However, in the days after the inauguration China conducted war games close to Taiwan.

Federal Deposit Insurance Corporation Chair Martin Gruenberg announced he will resign amid allegations of a toxic work environment at the agency. Gruenberg will remain in his post until a successor is confirmed by the US Senate.

The president of Iran, Ebrahim Raisi, and Foreign Minister Hossein Amirabdollahian were killed on Sunday in a helicopter crash in northwestern Iran.

Canada’s consumer price index rose 2.7% year over year in April, down from 2.9% in March. Markets are pricing in about a 62% chance of a quarter-point rate cut from the Bank of Canada at its June meeting.

European Central Bank President Christine Lagarde reiterated this week the strong likelihood of a quarter-point rate cut at the bank’s June meeting and said she is really confident that the ECB has inflation under control.

Consumer prices in the UK fell less sharply than expected in April, with the core reading falling to 3.9% from 4.2% the month before. Economists expected a deeper pullback to 3.6%. The chances of a June rate cut from the Bank of England declined to 6% after the data were released from about 50% before.

US existing home sales fell 1.9% in April to a 4.14 million annual rate while new home sales declined more sharply, by 4.7%, to a 634,00 annual rate.

During its fiscal first quarter, AI bellwether Nvidia more than tripled its revenues and earned $6.12 a share, excluding items. The company announced a 10-for-1 stock split and increased its dividend by 150%.

The US Trade Representative announced that new levies on electric vehicles and other exports from China will take effect on 1 August.

Both the S&P 500 and the Nasdaq 100 indices closed at record highs on Tuesday.

The ECB said this week that collectively bargained wages in the eurozone rose 4.69% year over in Q1 2024, higher than the Q4 2023 rate of 4.50%. Wage growth in Germany was particularly strong, rising 6.2% in the first quarter.

Israel recalled its ambassadors from Spain, Ireland and Norway as those countries committed to recognizing a Palestinian state.

The Biden administration this week unilaterally canceled an additional $7.7 billion in US student loans, bringing the total to $167 billion.

Japan’s 10-year government bond yield hit 1% for the first time in 11 years on Wednesday on the growing view that inflation is sustainably returning to the Bank of Japan’s 2% target for the first time in decades.

Semiconductor equipment–maker ASML and chip manufacturer TSMC said this week that they have contingency plans for disabling chipmaking machines in the event China invades Taiwan.

The US Securities and Exchange Commission on Thursday approved the listing of spot ether ETFs.

US durable goods orders rose 0.7% in April after March data were revised down to a gain of 0.8%. Core capital goods orders, which excludes aircraft, rose 0.3%. 

Core inflation in Japan moderated to a 2.4% year-over-year rise in April after increasing 2.9% in March.