In a world where economic policy decisions can disseminate at the speed of the internet, we find ourselves in a patient waiting stage as the real economy responds and internal forces play out.
Overview
A relatively quiet week has come and gone, with US and EU rate decisions largely falling within the range of expectations. Another policy-driven week looks to be on the books ahead, with recession concerns amongst investors looking to be somewhat reduced. Currently, We are in a stage that requires patience. While the most recent economic readings and policy decisions can propagate and get priced in at the speed of the internet, the real economy takes time to respond and have its internal forces play out.
Policy
The FOMC’s decision not to raise rates was within the range of expected outcomes. Despite the pause, Fed officials have also signalled a couple more hikes down the road. Powell’s testimony to Congress would hopefully offer a little more clarity while leading indicators on Thursday and S&P’s PMI flash would help give some hard data in support.
Beijing will be looking to support its over-extended ‘dynamic-zero’ policy and has cut its prime rates by 10 bps. However, market responses have been lacklustre given the depth of China’s apparent economic woes. Massive youth unemployment, deflationary pressures, weak exports and factory output cannot be meaningfully alleviated by minor rate cuts. As it is, it is quite possible China is looking at repeating Japan’s Lost Generation, except without a developed country’s GDP per capita.
In Japan itself, the Bank of Japan continues to hold onto its ultra-loose policy despite inflation staying above 3% for more than a year. JPY continues to show weakness against the USD as a result even as the dollar index (DXY) itself hovers around the lower end of its 52-week range.
Lastly, the Bank of England’s decision will be closely watched as it struggles to balance inflationary and recessionary pressures. Markets expect either a 25 bp or 50 bp raise, following in the ECB’s footsteps. The UK’s government borrowing costs are growing heavier by the day, and we may see the strains in the UK’s financial system, last seen in Liz Truss’ tenure, reveal themselves again.
Upcoming Calendar Events
- Powell testimony (21 Jun)
- UK inflation data (22 Jun)
- UK interest rate decision (22 Jun)
- US leading indicators (22 Jun)
- S&P US PMI flash (23 Jun)
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