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Stocks Fall on Bank of England Rate Hike Fears, US Inflation Likely to Decelerate
Last Week Review
Developed ex-U.S. equities lost 1.8% last week because of investor concerns about more potential rate hikes by the Bank of England and how that could hurt Europe’s economic growth. U.S equities also fell while emerging market equities had a modest loss. The 10-year Treasury yield gained 0.22% and the two-year yield rose 0.05%.
Fed Minutes Show Small Bias Toward More Rate Hikes
The Federal Reserve published on Wednesday the minutes from the June Federal Open Market Committee meeting, when the committee decided not to raise its policy rate. The minutes indicated that several members wanted to continue rate increases. However, we think investors already knew of this from recent speeches by Fed members. The minutes offered little new information and we think the Fed outlook continues to be guided by incoming economic data. Interest rates were volatile the day the Fed released the minutes, but movement in U.K. government bond yields may have driven that. The two-year yield rose 0.18% from Tuesday to Thursday before retracing some of that gain by the end of last week. Based on futures trading, investors expect the Bank of England will hike its policy rate five to six more times in its effort to contain inflation.
U.S. Job Gains Decelerate and Fall Below Expectations
U.S. employers added 209,000 jobs in June, below expectations and a decline from 306,000 jobs added in May (which was revised down). The unemployment rate fell to 3.6%, as expected, from 3.7% in May. Wage gains were unchanged at 4.4% year-over-year. While we believe the report showed some cracks in the job market, we think it still indicated strength. The slowing trends in the jobs market may marginally (if at all) ease pressure on the Fed, but we think a 0.25% is likely at the next Federal Open Market Committee meeting.
Oil Prices Gain on OPEC Supply Cuts
Oil gained last week after OPEC+ decided to cut supply by 1.5 million barrel per day in August, primarily from Russia and Saudi Arabia. Still, prices have fallen year-to-date on a worsening economic outlook and a lackluster recovery in China. Manufacturing activity remains a sore spot. The global manufacturing Purchasing Managers’ Index continues to show contraction, though services continue to expand.
This Week Preview
U.S. Inflation Expected to Cool
The U.S. Consumer Price Index report scheduled for Wednesday is expected to show that inflation decelerated to 3.1% year-over-year in June from 4.0% in May. Core inflation, which excludes more volatile food and energy prices, is expected to slow to 5.0% from 5.3%.
Rate Hike Possible in Canada, Central Bank Members Globally Scheduled to Speak
The Bank of Canada is expected to announce an 0.25% rate hike on Wednesday, but there is a chance that it holds. A number of public speeches from monetary policymakers are scheduled during the week, including some from members of the Fed, European Central Bank and Bank of England.
China’s Economic Update Could Confirm Weak Recovery
Expectations for muted consumer inflation and a decline in producer prices may underscore deflationary pressures, while trade may fall on a year-over-year basis from weak exports. We think investors will look for any escalation in U.S.-China trade strains.
Second Quarter U.S. Earnings Likely to Fall
Total earnings of companies in the S&P 500 Index are expected to decline 7.2% year-over-year on a slight fall in sales. JPMorgan and Wells Fargo are scheduled to report on second-quarter earnings on Friday.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of July 10, 2023.
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