Daily Updates 23 Jun 2023

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Summary

The Bank of England raised interest rates due to strong inflation, causing a temporary spike in GBP. However, with weak GDP growth, rising inflation, and dissenting votes against the hike, the UK economy is facing tougher times, potentially leading to stagflation and a weaker currency in the coming weeks.

What Happened Yesterday

Market Movements as of New York Close 22 Jun 23

  • Fedspeak:
    Bowman (2024 voter, known hawk): 
    “Additional rate hikes needed to control inflation.” “Although tighter monetary policy has had some effect on economic activity and inflation to date, we have seen core inflation essentially plateau since the fall of 2022.”
  • Japanese inflation came in weaker than expected this morning at 3.2% Year-on-Year (vs +4.1% expected), down from 3.5% previously. The core index, which only excludes food in Japan, showed that prices rose 3.2% YoY (vs 3.1% expected), slightly lower than the previous print of 3.4%. This sign of faltering inflation will likely allow the BoJ to keep its ultra dovish policy for the time being.
  • The Swiss National Bank raised interest rates by +0.25% to +1.75% as expected. The EUR rallied +0.38% from 0.9794 to 0.9831against the CHF on the news despite the SNB saying that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term cannot be ruled out.
  • The Bank of England surprised markets by raising interest rates by +0.50% in its monetary policy meeting (vs +0.25% expected). In its policy statement, the BoE mentioned “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”  The central bank also noted that inflation is expected to fall significantly this year, mostly due to energy prices. The GBP spiked +0.43% against the USD to the 1.2840 level in reaction to the decision but fell to a low of 1.2740 soon after and settled lower on the day.
  • In his second day of testimony, Federal Reserve Chairman Powell noted that it will be appropriate to raise rates again this year, perhaps two more times as the central bank has not seen much progress in services inflation. However, he also added that the Fed is close to where the destination is on rates but does not see rate cuts until inflation is confidently moving down to 2%.
  • US Weekly Jobless claims for the week ending on Jun 17 came in at 264k (vs 260k expected), the same as the previous week. The continuing claims for the week ending on Jun 10 fell slightly to 1,759k (vs 1,782k expected) from 1,772k. Jobless claims numbers were pretty stable this week.
  • The US Treasury Yield curve inversion widened slightly to 0.97% as the 2yr bond yield rose +0.09% to 4.77% while the 10 yr bond yield rose +0.08% to 3.80%.
  • The US Stock futures drifted lower through the Asian and London trading session due to Powell’s hawkish remarks from the day before. The S&P 500 futures was down -0.28% just before the release of the US jobless claims data.
  • The US stock market traded higher upon market open following the jobless claims data and continued moving higher following comments from Fed Chair Powell. Consequently, the S&P 500 closed the day higher at +0.37% (intraday high: +0.38%, low: -0.32%), the Dow Jones fell slightly by -0.01% (intraday high: +0.15%, low: -0.34%). while the Nasdaq rose +1.18% (intraday high: +1.19%, low: -0.49%).
  • The crypto market traded lower as the positive momentum stopped. Bitcoin slipped -0.4% while Ether fell -0.9%.

Day Ahead

Purchasing Managers’ Index data from Europe and the US are slated to be released.

Notable Headlines

U.S.-China tech battle entering its ‘primetime’ — and generative A.I. could be the next frontier

Notable Snippet: Generative artificial intelligence, the technology that viral chatbot ChatGPT is based on, could be the new battleground in the battle for tech supremacy between the U.S. and China, according to one analyst.

Washington has sought to cut off China from key technology like semiconductors while China has looked to boost its self-sufficiency and wean itself off American technology, touting its domestic sectors.

“The status quo isn’t likely to change much on any front — from sanctions to business pressure,” Abishur Prakash, CEO of Toronto-based advisory firm, The Geopolitical Business, told CNBC via email.

“What China wants, the U.S. isn’t going to give, like opening up the chip ecosystem to Beijing or not scrutinising Chinese investment in U.S. technology,” Prakash said. “The U.S.-China battle for technology supremacy is about to enter its primetime.”

Unlike the previous flashpoints, like over 5G or TikTok, when both sides still believed differences could be patched over, now such ideas are politically dead. The chasm between the U.S. and China has expanded so much — and neither superpower wants to bridge the differences.”

US banks push back as regulators prepare international capital hikes

Notable Snippet: U.S. banks are pushing to soften a major regulatory proposal to hike bank capital requirements, worried it could prove too onerous, especially for lenders still reeling from the March banking crisis, according to six people briefed on the matter.

Bank regulators led by the U.S. Federal Reserve are finalising the proposal which would implement international capital standards agreed by the Basel Committee on Banking Supervision in the aftermath of the 2007-2009 financial crisis.

Bankers are particularly concerned by an aspect of the draft proposal that would apply higher capital charges on non-interest revenue, such as the fees lenders charge on credit cards or investment banking services.

That capital charge is part of the package agreed by the Basel Committee in 2017, but the industry says it overstates the risk for banks that have a high proportion of non-interest income and had hoped U.S. regulators would mitigate its impact, the people said.

Bank groups are pushing for regulators to cap the proportion of assets on which such charges would apply, said three people, but it was unclear if the agencies would take that approach.

Fed’s Powell says rate hikes will come at a “careful pace” from here

Notable Snippet: The U.S. Federal Reserve Chair Jerome Powell said on Thursday the central bank would move interest rates at a “careful pace” from here as policymakers edge towards a stopping point for their historic round of monetary policy tightening.

“We’re at least close to where we think our destination is…and it only makes common sense to move…at a careful pace,” Powell said at a hearing before the Senate Banking Committee.

“The point” of holding rates steady at the Fed’s meeting last week, Powell said, was precisely to slow the speed with which the Fed was raising borrowing costs.

But Powell did say he shared the broad economic outlook of his colleagues for modest economic growth, a slight rise in unemployment, and slowly declining inflation over the rest of the year.

Best,
Phan Vee Leung
CIO & Founder, TrackRecord