What a week!
Many described last week's cavalcade of world economic events as the most important week of 2018, including Bloomberg. For macroeconomic geeks (like us) it delivered.
Let's take it day-by-day:
The week started out with a thrill as a daredevil raccoon climbed a 25-story Minnesota skyscraper over the course of 48 hours and became an instant national sensation! Not sure what possessed her to do it, but what really possesses anyone to do crazy stuff? And not sure what this had to do with the world economy … other than Monday was a slow news day!
Tuesday Part I
The long-awaited, much-hyped bilateral summit between the U.S. and North Korea went down and marked the first time ever that an incumbent president met with a North Korean head of state! While the budding relationship between President Trump and Kim Jong-un is seen as the best shot at peace between the two countries, the discussions largely lacked depth and North Korea made few concessions. Denuclearization was explicitly mentioned, but Kim just vaguely pledged to continue to cooperate in the negotiations and to help lay the groundwork for peace.
Most expert observers remain optimistic, and Asian equity markets reacted positively to the "derisking of the pennisula" news.
No official word on Dennis Rodman's diplomatic contribution!
Tuesday Part II
The much-watched U.S. inflation report for May was released and showed "headline" inflation accelerated to a six-year high, rising 2.8% on a year-over-year basis led by strong gas and housing prices. However, "core" inflation — a reading that removes the volatile components for food and energy and comes closer to the inflation gauge the Federal Reserve Bank uses to monitor interest rates — was only up 2.2% year-over-year, back to levels from just over a year ago. While higher than the recent inflation trend, inflation is nowhere near out of control despite a robust employment market.
The June Federal Reserve Bank two-day monetary policy concluded with a 0.25% hike in short-term interest rates and the committee's updated outlook. The outlook included upticks in their views on the economy, employment and consumer spending. Most importantly, the committee set the stage for two additional 0.25% hikes in 2018 (most likely in September and December) and then at least three more in 2019.
During the press conference after the meeting, new Fed Chairman Jerome Powell kept it down to earth and pragmatic:
“The decision you see today is another sign that the U.S. economy is in great shape. Growth is strong. Labor markets are strong. Inflation is close to target. As the economy has strengthened and as we’ve gradually raised interest rates, the question comes into view of, how much longer will you need to be accommodative and how will you know?...We’ll be guided by incoming data on the economy.”
Though the outlook was more "hawkish" than expected, both bond and stock markets took it in stride and did not react aggressively one way or another.
The next day it was the European Central Bank's turn to wax poetic on monetary policy. It decided to finally end its quantitative easing bond buying program (only four years behind the U.S), making it the second-to-last major bank to do so. Japan is still clinging to its program.
However, it is still hesitating to raise interest rates, holding the bank deposit rate at -0.4% (that's right, it's negative!). This decision was likely motivated by ongoing political instability in Italy and the brewing international trade war. Notably, though, ECB President Mario Draghi indicated the bank will more seriously consider raising rates beginning in the fall. Net effect: the euro currency was down and equity markets were up.
Rounding out the week, the Bank of Japan (BOJ) chimed in on its view of monetary policy. The BOJ downgraded its assessment on inflation, and Governor Kuroda stressed his resolve to keep the money spigot wide open, reinforcing views Japan will lag well behind its U.S. and European peers in dialing back crisis-mode policies. Kuroda's summary comment: “Japan’s economy is seeing labor markets tighten and the output gap improving, but prices aren’t rising much. As such, it’s most appropriate to patiently maintain our powerful monetary easing.”
Again, what a week for macroeconomic geeks like us! Maybe the most interesting takeaway is how capital markets reacted to all of the events — or how they didn’t react is more like it! Small moves around each new data point, but large moves — up or down — did not manifest. Perhaps market participants are still digesting all of the news … we shall see.
Contact Russell Moenich to learn more about this topic.
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