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06 June 2022
- The meeting between US President Joe Biden and Fed Chair Jerome Powell on Tuesday, which was also attended by former Fed Chair Janet Yellen, raised a lot of expectations among investors, but in the end, did not bring any surprising solutions.
- Inflation and the state of the economy were the main focus of the meeting. While the Fed is trying to combat rapid price increases, one camp is criticizing it for reacting too slowly, while the other group is worried that an overly forceful response today could trigger a recession in the U.S. economy.
- President Biden recognizes that inflation is the biggest economic challenge today and the Fed is primarily responsible for controlling it and laid out a three-part plan of things that can be done on the fiscal and executive side. Among them: containing oil costs, fixing broken supply chains and improving infrastructure, while also reducing the federal deficit.
- Janet Yellen admitted after the meeting that she “was wrong about the path inflation would take” and didn’t think it would be a long-term problem. However, the unexpected shocks to the economy and problems with supply chains, that have boosted energy and food prices, are ultimately having a much worse impact on the US economy than she expected.
Indices
US stocks fell again after one successful week. Investors are still concerned that the Fed will not be able to effectively fight inflation without causing a recession. Investors were also unnerved by the JP Morgan chief’s remarks that he expects an economic hurricane due to rising interest rates and high commodity prices, and by the news that Tesla may have to lay off up to 10% of its workforce due to the poor economic situation. The good NFP data then reassured investors that the Fed is unlikely to slow the pace of interest rate hikes.
Stocks in Europe also ended slightly lower, with the reasons for the declines remaining the same. The war in Ukraine, rising inflation and the related planned rate hikes by the ECB, along with a decline in economic growth. The pan-European STOXX Europe 600 Index ended the week 0.87% lower, the DAX40 was little changed, France’s CAC 40 fell 0.47% and the UK’s FTSE 100 Index declined 0.69%.
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US30 -0.94% |
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US100 -1.05% |
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US500 -1.20% |
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GER40 -0.01% |
Commodities
Oil strengthened again last week, despite OPEC+ countries agreeing to increase production by 648,000 barrels per day in both July and August. The problem is that Russian production has already fallen by about 1 million barrels a day since the war began. Further sanctions could increase the shortfall to as much as 2 to 3 million a day. Indeed, the EU has agreed to ban imports of 90% of Russian oil by the end of this year. Seaborne deliveries of Russian oil would be forbidden, for pipeline transfers applies temporary exemption until a solution is found that would meet the energy needs of Hungary, Slovakia, and the Czech Republic.
Gold lost slightly over the past week despite good US labour market data pointing to a continuation of Fed rate hikes and the start of ECB hikes. Thus, the gold price is likely to be influenced by the strikes by unions at Sibanye Stillwater and the decline in gold production in Ghana by 30% last year to the lowest in a decade. Gold demand has fallen in China and India due to high inflation and the end of the wedding season.
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Gold -0.12% |
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Silver -0.85% |
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BRENT +4.71% |
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NATGAS -2.22% |
Forex
The Japanese yen has started to lose ground again since the beginning of June. However, the Bank of Japan is apparently not bothered by the current development, or rather, it still welcomes it. According to the BoJ, the inflation target of 2% has not been reached, although the core CPI rose by 2.1% YoY in April. Rapidly rising prices could negatively affect household sentiment, according to Bank of Japan (BoJ) Governor Haruhiko Kuroda, and the BoJ is therefore not thinking about tightening monetary policy anytime soon. The weak yen is not a problem for the Japanese economy, according to the central bank.
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EUR/USD -0.13% |
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USD/JPY +2.92% |
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GBP/USD -1.10% |
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USD/CAD -1.00% |
Macro
Friday’s NFP data was better than expected, when the economy added 390,000 payrolls in May, which is above the expected 325,000. The unemployment rate remains at 3.6%, the same as the month before, above the forecast of 3.5%. Thursday’s initial jobless claims surprised modestly on the downside, while April job openings remained slightly below record highs at 11.4 million. The Conference Board’s index of consumer confidence fell in May, as more Americans feel that getting a job is getting harder today. The manufacturing PMI data showed a surprising acceleration in manufacturing activity in May, while on the other hand the level of activity in the service sector fell more than expected.
Eurozone inflation rose to 8.1% in May, a new all-time high after 7.4% in April, according to preliminary data, while markets had expected a rise to 7.7%. Core inflation rose to 3.8% from April’s 3.5%, still well above the ECB’s target of 2%. A rate hike by the ECB is virtually inevitable, as confirmed by ECB policymaker Robert Holzman, who said high inflation backs the need for a 50bp hike.
What to watch out for this week
- In the US, we are waiting for inflation numbers on Friday. In May, we should see a year-on-year increase of 8.3%, as was the case in April. Core inflation, excluding food and energy prices, is expected to rise by 5.9% year-on-year after April’s 6.2%. The inflation report will be the last one before the Fed meeting and will serve as the last indicator in deciding the next interest rate move.
- The awaited interest rate decision from the ECB is one of the few that have not yet moved to adjust its extremely accommodative monetary policy. Inflation in the eurozone is reaching record highs and this meeting should clarify the ECB’s stance on a possible rate hike in the third quarter.
- Investors will also await a possible meeting between US President Biden and Saudi Crown Prince Mohammed bin Salman. Relations between the US and Saudi Arabia are strained over the conflict in Yemen and the killing of journalist Jamal Khashoggi. In recent weeks, attempts have been made to repair the longstanding tensions due to high gasoline prices as U.S. gasoline prices hit record highs and Joe Biden seeks to visit the Kingdom during a trip to the region later this month. An increase in production by OPEC+ countries could be the first step towards achieving a change in relations between the two countries.
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