At the close of business last Friday, global equities were lower on the week amid hawkish central bank action. After soft purchasing managers’ data were released on Friday, a large rally in German bunds dragged the yield on the US 10-year note lower, to 3.71% from 3.77% a week ago. The PMI data helped contribute to a $3 slide in the price of a barrel of West Texas Intermediate crude oil, to $67.75. Volatility, as measured by the Cboe Volatility Index (VIX), held steady at 13.6.
This coming week we will watch data on China’s manufacturing industries. The US Federal Reserve will also release their preferred measure of inflation, and we will monitor how it is discussed when global central bankers come together in Portugal for an annual conference.
CANADIAN ECONOMIC NEWS
Forecasters are expecting the annual inflation rate in Canada to slow significantly. On Wednesday, Statistics Canada will announce the consumer price index (CPI) for May, which will give us the latest inflation info before the Bank of Canada’s interest rate decision on July 12. We expect to see our annualized inflation rate to drop below 4%.
One of the troubling things we are paying close attention to is the amortization period on existing mortgages. Amortization refers to the time it takes to pay back a mortgage. As elevated interest rates hit the housing market, some people have been working with their financial institutions and extending their amortization period sometimes for several decades and are only paying interest on their homes. This is helping banks avoid defaults on mortgages, but the worry is the extended amortization periods raise questions about how lenders will deal with the situation when a mortgage is up for renewal. Normally, if you couldn’t negotiate a lower rate at a different lender, you could typically get a renewal at your existing lender. We believe there could be uncertainty going forward for those looking to renew who aren’t able to secure a renewal with their current bank or switch lenders.
US ECONOMIC NEWS
The U.S. economy has proved to be surprisingly resilient in the first half of this year, despite continued interest rate hikes. US CPI data will be announced on Tuesday. The latest consumer confidence report slipped to a six-month low in May. The week ends with the May personal consumption expenditures (PCE) price index on Friday, a key inflation gauge. In the 12 months through April, the PCE price index increased 4.4%. The Federal Reserve tracks the PCE price indexes for its 2% inflation target, and the data will feed into the central bank’s next rate decision in July after it left rates unchanged at its June meeting.
US Federal Reserve Chair Jerome Powell, in his semiannual congressional testimony on monetary policy, told lawmakers this week that the pace of Fed rate hikes has slowed. Powell told the Senate Banking Committee on Thursday that decisions will be made on a meeting-by-meeting basis. He said that policymakers expect the unemployment rate to rise further but that he still sees a path to an economic soft landing,
The US 2-year/10-year yield curve is close to its March lows (-108 basis points), with the 10-year Treasury note yielding 100 basis points less than the 2-year note. The last curve inversion this deep was in the early 1980s. A persistently inverted yield curve has historically forewarned of recession.
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EUROPEAN ECONOMIC NEWS
As expected, the United Kingdom reported stronger than expected inflation readings for May. The Bank of England raised its base lending rate 0.5% to 5%, more than the 0.25% hike markets had been expecting. Norway’s Norges Bank also hiked rates a half-percent on Thursday, to 3.5%. The Swiss National Bank hiked a more moderate 0.25% to 1.75% on Thursday but signaled additional hikes are likely. Turkey’s new central bank governor disappointed markets by hiking rates to 15% from 7.5% in a post-reelection reversal of President Tayyip Recep Erdoğan’s unconventional monetary policy. With Turkish inflation running at 39%, investors had expected a larger rise.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
The People’s Bank of China was the lone major central bank to lower rates this past week, cutting the important loan prime rate 0.1% to 4.2% in an effort to lower borrowing costs and boost confidence and consumption.