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Fed Chair Jerome Powell’s semi-annual congressional testimonies on monetary policy sank the US Treasury 10Y yield to 3.087%, its lowest close since 9 June. Powell’s unconditional commitment to restore price stability were eclipsed by his comment that a recession cannot be totally ruled out. Today, St Louis Fed President James Bullard should reiterate his view for the US labour market to stay robust and for the US economy to expand this year. Nonetheless, Fed officials were united in the goal to expeditiously return the Fed Funds Rate, currently at 1.75% after last week’s 75 bps hike, to the 2.5% neutral rate. Fed Governors Michelle Bowman and Christopher Waller favour achieving this with another 75 bps hike at the next FOMC meeting on 27 July. Today, let’s see if Bullard and St Francisco Fed President Mary Daly lean towards their position too.
Otherwise, US lawmakers were positioning for the US midterm election on 8 November. During Powell’s testimony, the Democrats were on the defensive from Republican rivals pushing to pin the blame of inflation on President Joe Biden’s massive stimulus. If a US recession materializes after the Democrats lose control of at least one house of Congress, the politicisation of inflation could hinder the fiscal responses to support the US economy before the US presidential election in 2024. The risk of US growth underperforming its peers again will harm the USD against its DXY components. US consumers could become more frustrated if they add jobs and owning a home to their frustration with elevated inflation.
The focus is also on employment, the Fed’s other mandate. US initial jobless claims have risen after the Fed hike cycle started on 16 March. On a 4-week moving average basis, claims rose to 224k for the week ending 17 June after bottoming at 171k on 1 April. Consensus expects nonfarm payrolls (on 8 July) to drop to 303k in June from 390k in May. The Fed has already pencilled in a higher 3.7% unemployment rate of 3.7% in 4Q22 in last week’s Summary of Economic Projections. US Treasury Secretary Lawrence Summers reckons the jobless rate needs to rise above 5% for five years to contain inflation.
Today, US new home sales might also disappoint. After the whopping annualized 16.6% MoM drop in April, consensus reckoned new home sales would drop marginally to 590k in May from 591k in April. However, existing home sales fell for the consecutive month to 5.41 million units, its lowest level since July 2020. Americans are finding it harder to own homes because of the run-up in mortgage rates amidst record home prices. Worries will emerge if new home sales come in beneath the Covid low of 582k in April 2020.
Quote of the day
“I was the future once.”
David Cameron
24 June in history
British Prime Minister David Cameron resigned after the UK voted to the leave EU in the Brexit Referendum in 2016.
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