Markets Look Past Cautious Fed

For the week ending 14 June 2024

As of midday Friday, global equities were slightly lower on the week amid concerns over upcoming parliamentary elections in France. The yield on the US 10-year Treasury note declined 22 basis points from a week ago, to 4.21%, after improved US inflation data. The price of a barrel of West Texas Intermediate crude oil rose $3 to $78.55 while volatility, as measured by the CBOE Volatility Index (VIX), was little changed at 12.5. 

MACRO NEWS

Benign US inflation data overshadow circumspect Fed

Shortly before the US Federal Open Market Committee met on Wednesday to set interest rates, data were released that showed that consumer prices in the United States were unchanged in May. Core inflation rose at a less-than-expected 0.2% month over month while CPI rose 3.3% year over year and at a 3.4% rate when excluding food and energy. The closely watched core services ex housing measure declined 0.04% in May, its first negative reading in nearly three years. Soft producer price data on Thursday eased concerns that the disinflationary trend had stalled.

FOMC trims rate-cut outlook, ups inflation forecast

As widely expected, the US Federal Reserve held rates steady on Wednesday, but the quarterly Summary of Economic Projections (SEP) depicted a cautious mood among policymakers. When FOMC members last updated their forecasts in March, the median expectation was for three interest rate cuts before the end of 2024 and for the core PCE inflation rate to fall to 2.6%. This week, Fed officials penciled in only one hike for the balance of the year and raised its 2024 inflation view to 2.8%. Fed Chair Jerome Powell told reporters Wednesday afternoon that the SEP had been compiled before the release of soft CPI data that morning but that few members of the committee updated their assumptions after reviewing the data. The median forecast for the longer-term Fed funds rate rose to 2.8% from 2.6%, suggesting Fed officials see a higher neutral rate of interest than they had earlier in the year. While these adjustments to the outlook appear hawkish at face value, the fact that FOMC members now see four cuts in 2025, up from three in March, took a good deal of sting out of the news. Despite the Fed’s more cautious view, markets are nearly pricing in two full rate cuts before the end of the year. 

Snap elections in France rattle markets

Elections late last week for European Parliament saw right-wing populist parties make modest gains, but they did not upset the status quo at a pan-European level. The story in France was different: Marine Le Pen’s National Rally Party won more than 30% of the vote, more than doubling the total of French President Emmanuel Macron’s Renaissance Party. Macron’s party’s poor showing prompted him to dissolve parliament and call snap legislative elections, to be held in two rounds, on 30 June and 7 July. Macron ran into deeper political difficulty on Thursday when a group of left-wing parties banded together to strike a unity pact. Markets fear, now that the once-fractured left has unified, that Macron’s centrist party will fall to third place and National Rally will gain control of parliament. If that were to happen, Macron would remain president until 2027 but would lose control over the domestic agenda. Markets are concerned that Le Pen’s party will cause a budget blowout like the one the United Kingdom experienced during the short tenure of Prime Minister Liz Truss. 

QUICK HITS

Canadian Finance Minister Chrystia Freeland has proposed a hike in the country’s capital gains tax. Under the plan, 50% of the first $250,000 in capital gains an individual taxpayer earns would be taxed. For every dollar beyond $250,000, two-thirds would be taxable.

Inflation expectations in the US over the next year have fallen to 3.17% from 3.26% last month, according to a survey by the Federal Reserve Bank of New York.

Average weekly earnings in the UK rose 5.9% in the quarter ended in April, while the country’s unemployment rate ticked up to 4.4% from 4.3%.

Fitch affirmed Argentina’s sovereign credit rating at CC.

The European Commission said it will impose a 25% tariff on imports of electric vehicles from China.

Bank of Canada Governor Tiff Maklem said Canadian monetary policy no longer needs to be restrictive.

At this week’s G7 summit in Italy, US President Joe Biden and European leaders agreed on a plan to loan Ukraine up to $50 billion using interest on frozen Russian assets.

Meeting with Republican lawmakers on Capitol Hill, former President Donald Trump floated the idea of an all-tariff federal revenue system large enough to replace the income tax. He also vowed to undo Biden’s policies championing electric vehicles.

This week, the US imposed fresh sanctions on Chinese companies that are helping Russia in its war against Ukraine. The sanctions also targeted Russian financial infrastructure to limit the flow of hard currency in and out of Russia.

The right-wing Reform UK Party, led by Nigel Farage, has overtaken the ruling Conservative Party of Prime Minister Rishi Sunak, according to a YouGov poll released Thursday. That pushes the conservatives into third place. The Labour Party holds a 22-point lead, the poll showed.

May consumer prices in Argentina rose 4.2% from the month before, less than half the 8.8% pace in April. Also in Argentina, an austerity pact offered by President Javier Millei advanced in the Senate on Thursday.

The Bank of Japan said it will outline changes to its bond-buying program at its next meeting, suggesting changes will likely be sizable. 

Ukraine’s president, Volodymyr Zelensky, says China’s President, Xi Jinping, told him China won’t sell weapons to Russia.