Macro

UK:
The Bank of England (BoE) took the market by surprise as it raised its key interest rates by 0.5 percentage points to 5.0%, marking the highest level since 2008. The Monetary Policy Committee (MPC) voted 7-2 in favor of accelerating the pace of policy tightening due to unexpectedly robust inflation data. The MPC highlighted the significant upside news in recent data, suggesting a more persistent inflationary trend.

In May, headline annual consumer price growth remained unchanged for the fourth consecutive month at 8.7%. Core inflation, which excludes volatile food and energy prices, rose to a 31-year high of 7.1% from April’s 6.8%.

EU:
Norway’s central bank increased its key interest rate by 0.5 percentage points to 3.75%, reaching the highest level since 2008. The bank indicated a likely additional rate hike in August to address inflation levels that are significantly above the target. Similarly, the Swiss National Bank raised its benchmark interest rate by a quarter percentage point to 1.75%, marking the fifth consecutive increase, and did not rule out further hikes.

While Eurozone business output experienced growth for the sixth consecutive month in June, it nearly stagnated, indicating renewed economic weakness after the initial recovery earlier this year. According to S&P Global’s purchasing managers’ survey data, the Flash Eurozone Composite Purchasing Managers’ Output Index dropped to a five-month low of 50.3 from May’s 52.8. A reading above 50 denotes expansion.

German producer prices in May increased at the slowest pace since July 2021, suggesting a potential easing of inflationary pressures. Annual producer prices rose by 1.0%, down from April’s 4.1%. Additionally, the Ifo Institute predicted a 0.4% contraction in the German economy for 2023, exceeding the 0.1% forecast made in March.

US:
Concerns about potential future rate hikes by the Federal Reserve weighed on market sentiment throughout the week. In his prepared testimony before Congress, Fed Chair Jerome Powell stated that the majority of policymakers expect further interest rate increases by the end of the year. The latest Summary of Economic Predictions from the Fed revealed that a majority of the policy committee anticipates at least two more quarter-point rate hikes in the coming year, although futures markets suggested otherwise.

Economic data released during the week deepened worries about tight monetary policy pushing the US toward a recession. S&P Global reported that its gauge of US manufacturing activity fell to its lowest level since December, well below consensus estimates. The report also indicated that suppliers were reducing prices at the fastest rate since the height of the pandemic lockdown in May 2020, likely due to weak demand.

While Fed Chair Powell asserted to Congress that the labor market remained tight, weekly jobless claims reached 264,000, matching the upwardly revised number from the previous week, marking the highest level since October 2021. However, the housing sector showed surprising strength, with housing starts reaching their highest level in over a year and exceeding expectations. Sales of existing homes also modestly exceeded projections.