[Daily Outlook] High inflation data could prompt the Fed to consider a 75bps rate hike this week

2022-06-14 14:31:01


High inflation data could prompt the Fed to consider a 75bps rate hike this week:

Accelerating U.S. consumer prices and rising inflation expectations could prompt the Federal Reserve to consider raising interest rates by the most since 1994 at this week's policy meeting. The Fed will wrap up its two-day policy meeting on Wednesday with an interest rate decision at 2 p.m. local time in Washington. Fed Chairman Jerome Powell hinted at a news conference after a policy meeting in early May that the central bank would raise interest rates by 50 basis points each in June and July, as long as economic data is in line with expectations. But over the past few days, U.S. inflation data has unexpectedly accelerated, and interest rate futures pricing showed investors ramping up bets that the Federal Reserve will raise rates by 75 basis points at this week's policy meeting. Bets on a 75-basis-point rate hike intensified Monday afternoon after The Wall Street Journal reported that Fed officials may be considering more aggressive rate hikes. Following Barclays and Jefferies, economists at Goldman Sachs and JPMorgan also changed their forecasts on Monday and now expect the Fed to raise rates by 75 basis points on Wednesday. Further reading U.S. inflation accelerates to 40-year high, putting more pressure on Fed and White House


The CEO of Morgan Stanley expects a 50% probability of a U.S. recession, and the Fed must act faster:

Morgan Stanley CEO James Gorman said he sees about a 50 percent risk of a U.S. recession. He is more concerned with non-financial risks, including the possibility of a cyber attack. "It is inevitable that this inflation is not temporary, and the Fed is bound to move faster than they expect," Gorman said Monday at the Morgan Stanley U.S. Financials, Payments and Commercial Real Estate conference. "There is a recession risk. I used to think it was around 30%. Now it's probably more like 50%, but not 100%. It's always good to be cautious." Gorman said Morgan Stanley has strong liquidity and capital, and a solid credit profile. He said he is focusing more on non-financial risks such as data stability, network and operational risks.


New York Fed Survey: Consumers' inflation expectations for the year ahead hit record high:

U.S. consumers expect prices to rise faster in the coming year, driving spending to a record high, according to a New York Fed survey. Expectations for inflation in the year ahead rose to 6.6 percent from 6.3 percent, matching the highest level since the survey began in June 2013. Such a scenario would shrink the wallets of Americans, with a New York Fed survey forecasting household spending to rise for a fifth straight month, up 9%. U.S. inflation accelerated to a fresh 40-year high last month, a sign that price pressures are entrenched and consumer confidence is hit. Markets further raised bets on a sharp rate hike by the Federal Reserve, with most traders betting on a 50 basis point hike this week. A quarter of respondents expect inflation to soar to a record 10% in the year ahead. In contrast, the median inflation forecast for the next three years was unchanged at 3.9%, a positive sign for the Fed, which wants to keep inflation expectations firm. Respondents are more pessimistic about prices than consumers surveyed by the University of Michigan in early June, which said consumers expect prices to rise 3.3% over the next 5-10 years, the largest increase since 2008 and up from May 3%.


The MSCI World Index entered a bear market, and tightening fears intensified under the weight of inflation:

The MSCI ACWI Index, which tracks the performance of global equities, has officially entered a bear market, with traders expecting accelerating inflation to keep major central banks tightening, dragging down the global economy. The MSCI World Index, which covers emerging and developed market equities, fell 21% to 597.64 on Monday from its mid-November peak. After falling more than 20%, the index followed the S&P 500 and entered a bear market. Safe-haven assets such as the U.S. dollar were sought after as investors’ risk appetite cooled. U.S. CPI inflation accelerated to a 40-year high in May, indicating that inflationary pressures are becoming entrenched. That could prompt the Fed to continue aggressively raising rates. Money market pricing now points to the federal funds rate peaking at 4% in the middle of next year.


UK unveils bill to overturn Brexit deal, EU considers new legal action against UK:

Britain has unveiled a bill that would overturn parts of the Brexit deal it signed with the European Union. The move could not only spark a trade war with the European Union, but would also expose Prime Minister Boris Johnson to strong opposition within his shattered Conservative Party. The bill aims to give the UK the power to unilaterally rewrite most of the Northern Ireland Protocol. The protocol allows Northern Ireland to remain in the EU single market after Brexit and establish a customs border with the UK mainland. If the new bill is passed, UK authorities will be able to tear up the regulatory framework agreed by the two sides in 2019 and replace it with new rules for customs inspections, taxation and arbitration. "This is a reasonable and realistic solution to Northern Ireland's problems," British Foreign Secretary Liz Truss said in a statement. "This will protect the EU single market and ensure there is no hard border on the island of Ireland."


Bitcoin slumps to 18-month lows amid renewed explosion of decentralized financial institutions:

Bitcoin fell to its lowest level in about 18 months as the Celsius lending platform froze withdrawals, fueling fears that systemic risks to the cryptocurrency ecosystem will accelerate the collapse of the digital asset market. Bitcoin, the world's largest digital currency, fell as much as 15% to $23,336, its lowest level since December 2020. Other cryptocurrencies also fell as broader selling pressure continued. The MVIS CryptoCompare Digital Asset 100 Index, which includes the top 100 cryptocurrencies, fell as much as 15% at one point. The total cryptocurrency market capitalization, which topped $3 trillion in November last year, had fallen below $1 trillion by Monday morning New York time, according to CoinGecko. “The fundamentals that underpin stability and recovery just don’t exist,” said Steven McClurg, co-founder and chief investment officer of cryptocurrency fund firm Valkyrie Investments. "It could get worse before it gets better."

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