A Central Bank Trifecta

by Investment Solutions Group, MFS Investment Management

As of noon on Friday, global equities were modestly firmer on the week after a flurry of central bank meetings and data showing that core inflation continues to cool. The yield on the US 10-year note rose 17 basis points to 3.99% from a week ago while the price of a barrel of West Texas Intermediate Crude oil added $3.25 to $79.75 amid signs of solid US growth. Volatility, as measured by the Cboe Volatility Index (VIX), slipped to 13.5 from 13.9 a week ago.

MACRO NEWS

Fed hikes but keeps door open for one more

The US Federal Reserve raised the Fed funds rate to between 5.25% and 5.5% on Wednesday and said it will hike further if necessary. Fed Chair Jerome Powell refuted the idea that the central bank is on pace to tighten policy at every other meeting, saying decisions will be made meeting by meeting. Wednesday’s move brought policy rates to their highest level in 22 years. The Fed upgraded its assessment of US growth from modest to moderate and Fed staff dropped its recession forecast. Rate cuts are unlikely in the next year, the Chair said, while noting inflation is unlikely to return to target until 2025. Markets are pricing in about a 40% chance of an additional Fed hike, likely to be the Fed’s last, in the coming two policy meetings.

Faster US growth makes Fed’s job harder

Powered by consumer spending and non-residential investment, preliminary US GDP data showed that the economy grew 2.4% in the second quarter, quicker than the 2% pace posted in Q1. Growth significantly outpaced the 1.8% consensus forecast. Along with five-month lows in weekly jobless claims and solid consumer confidence, the data suggest the Fed will need to remain vigilant in its fight against inflation. US 10-year Treasury yields rose over 15 basis points, above 4%, after the data’s release. However, yields dipped back below 4% on Friday morning, assisted by a drop in core PCE inflation, the Fed’s preferred measure, to 4.1% year over year in June from 4.6% in May.

ECB delivers ninth-straight hike

The European Central Bank hiked rates to 3.75% on Thursday, matching the highest level in the ECB’s 25-year history. Markets expect that the central bank is very close to its terminal rate for the cycle. ECB President Christine Lagarde acknowledged that the Governing Council is moving to a stage where it’s becoming data-dependent and said that past tightening is dampening euro-area demand. Lagarde said the ECB’s next move would be to hike rates or pause.

BOJ tweaks YCC policy

On Friday, the Bank of Japan tweaked its yield curve control policy which is designed to keep Japanese government bond yields in a narrow corridor. The bank said the former 0.5% cap on 10-year JGB yields will now be a reference level and that it will only intervene flexibly to limit yields, with a cap at 1%. The move is seen as a tentative first step toward monetary policy normalization, though the bank maintained its negative interest rate policy, saying more time is needed to sustainably hit its 2% inflation target. 10-year yields rose 13 basis points to 0.57% on the announcement while USD/JPY is about 1% lower than where it traded Thursday afternoon before a Nikkei News article presaged the BOJ shift. The Nikkei 225 Index fell 0.4%.

QUICK HITS

The Dow Jones Industrial Average snapped a 13-session winning streak on Thursday, its longest since 1987.

The Bank of England announced on Friday that former Fed Chair Ben Bernanke will lead a review into the BOE’s economic forecasting record.

Spain’s parliamentary election on Sunday 23 July proved inconclusive with neither the right- nor left-leaning blocs able to secure a majority. Both sides will attempt to cobble together coalitions with smaller parties, but if neither party is able to form a government after two months, new elections must be held.

For the first time in years, China’s Politburo dropped the phrase “housing is for living, not speculation,” raising expectations that the government is trying to rekindle the country’s stagnant housing market by easing restrictions. The Politburo also appointed Pan Gongsheng to lead the People’s Bank of China, replacing Yi Gang, who reached the official retirement age of 65. Commodities prices have been rising in recent weeks in anticipation of renewed economic stimulus.

Embattled California lender PacWest was acquired by Banc of California in a deal which includes a $400 million capital injection from a pair of private equity firms that will facilitate the sale of some of both firms’ low-yielding assets. After the transaction closes, the combined assets of the two institutions will drop from $48 billion to $36 billion.

Economists polled by Bloomberg lowered the consensus 2023 China GDP forecast to 5.2% from 5.5%.

Fitch upgraded Brazil’s sovereign debt rating to BB, two notches below investment grade.

The SEC is considering a rule regulating the use of artificial intelligence by brokerage firms and advisors.

According to an analysis by J.P. Morgan, US junk loan downgrades numbered 120 in the second quarter, amounting to $136 billion — the highest total in three years.

A looming strike threat was averted this week as logistics company UPS and 330,000 employees represented by the International Brotherhood of Teamsters agreed on a new contract.

US pending home sales rose 0.3% in June while new home sales fell 2.5%. Last week, existing home sales were reported 3.3% lower in June than in May.

The US Employment Cost Index cooled in the second quarter, rising 1%, down from its 1.2% gain in Q1.

EARNINGS NEWS

With just over half of the constituents of the S&P 500 Index having reported for Q2 2023, blended earnings per share (which combines reported data with estimates for those that have yet to report) show that earnings declined 7.5% compared with the same quarter a year ago, according to data from FactSet Research. The energy and materials sectors have shown the sharpest declines while consumer discretionary has the best growth. Sales were flat year over year.

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The views expressed in this article are those of MFS and are subject to change at any time. No forecasts can be guaranteed.

Past performance is no guarantee of future results.

Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research, CNBC.com.

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