[Fed] Market Expectations Have Diverged from the Fed

Remarks of Officials

Summary:

Despite repeated stresses from Fed officials, markets have chosen to trust recent economic data rather than Fed officials' speeches.

On June 20, ET, three Federal Reserve officials - Thomas Barkin, Austan Goolsbee, and Neel Kashkari delivered speeches. The main ideas are as follows.

Richmond Fed President Thomas Barkin said, "My personal view is that let's gain more confidence before we act. Before adjusting interest rates, we need to see expanding progress in inflation on a return to the Fed's 2% target.

When asked if the Fed could cut rates once and keep them there, Barkin said it depended on economic data. If the current situation persists, it may not be the best time for now to guide the timeline for subsequent policy adjustments.

Chicago Fed President Austan Goolsbee, the representative of dovish Fed members, said that if we get more very encouraging inflation data like the May inflation report, which means that inflation is moving towards 2%, then I think we can cut rates.

Minneapolis Fed President Neel Kashkari said on Thursday that the Fed would return inflation to its 2% target, but it could take a year or two. The path of interest rates will depend on the economy, and the fundamentals of the US economy are very healthy and strong at the moment, which are expected to be maintained. However, there is some evidence of some softening around the margins.

Last week, Fed officials announced to leave interest rates unchanged at the meeting and cut the predicted number of rate cuts this year from three in March to one. Policymakers said they would like to see more evidence that inflation is moving towards its 2% target before confidently starting the rate cuts.

However, despite repeated stresses from Fed officials, markets have chosen to trust recent economic data rather than Fed officials' speeches. According to the CME Fed Watch tool, the Fed is still widely expected to cut rates twice in September and December. In other words, market expectations have currently diverged from those of the Fed.

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Samantha Luan

Economic

The precious metal has been on an upward trajectory, recouping most of the $84 loss experienced following the strong jobs report on June 7. This steady ascent is largely attributed to a series of economic indicators pointing towards a contracting economy and diminishing inflation. Gold Prices Rally Amid Economic Slowdown and Inflation Decline_1

Two key reports released today further bolstered gold's position:

1.US jobless claims declined to 238,000 last week, down from 243,000 the previous week.

2.Housing starts fell to a seasonally adjusted 1.28 million in May, below the April figure of 1.36 million and falling short of estimates.

These reports, coupled with recent data showing moderating labor market conditions, easing price pressures, and softening retail sales, suggest tepid second-quarter GDP growth. This aligns with the Federal Reserve's goal of seeing consistent evidence of declining inflation.

Chicago Federal Reserve Bank President Austan Goolsbee recently described the latest consumer price inflation reading as "excellent," expressing optimism for further cooling this year. While the Fed maintains that no single data point is definitive, the cumulative evidence is building a case for potential rate cuts.

Market sentiment is shifting, with participants increasingly betting on a rate cut as early as September. The CME's FedWatch tool indicates:

35.9% probability of unchanged rates57.9% probability of a 25-basis-point cut6.2% chance of the Fed funds rate falling between 4.75% and 5% after the September FOMC meeting

As the impact of the Fed's monetary tightening continues to affect economic activity, each new data point released strengthens the case for a policy pivot.

Inflation is showing signs of abating after a prolonged period of stubbornly high readings, potentially paving the way for the Federal Reserve to cut rates sooner than initially anticipated.

This economic landscape, characterized by slowing growth and declining inflation, has created a favorable environment for gold, resulting in two new record price highs recently.

Source:KITCO

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FastBull Featured

Daily News

[Quick Facts]

1. U.K. June GfK consumer sentiment rises to highest since Nov. 2021.

2. U.S. initial jobless claims fall from a 10-month high.

3. Fed's Barkin says more data are needed before rate cuts.

4. BOE keeps rates unchanged but hints at approaching rate cut timing.

5. Fed's Kashkari says it may take a year or two to bring inflation to 2%.

6. U.S. new home construction falls to the slowest pace in four years.

[News Details]

U.K. June GfK consumer sentiment rises to highest since Nov. 2021

U.K. June GfK consumer confidence index rose to -14 from -17 in May, reaching its highest level since November 2021, as households' assessment of the overall economic situation improved, which overshadowed concerns about their financial situation.

Although the confidence index came in at -14 in June, it was the third consecutive monthly increase. As the cost of living crisis continued to hit household budgets, with many experiencing difficulties, the overall confidence index remained negative.

In addition, households' assessment of the general economic situation over the past 12 months rose by 7 points, and their assessment of the outlook rose by 6 points. However, their assessment of their financial outlook fell 3 points from May, and their assessment of their financial situation over the past year remained unchanged.

U.S. initial jobless claims fall from a 10-month high

Initial jobless claims fell by 5,000 to 238,000 in the week ended June 15, retreating from a 10-month high and beating expectations of 235,000, data released by the U.S. Bureau of Labor Statistics showed. The four-week average rose to 227,000, the highest level since last September.

In addition, continuing jobless claims rose for the seventh straight week to 1.82 million by June 8, just 1,000 short of the highest level at the end of 2021.

New claims before adjustment for seasonal influences rose by 38,530 to 234,707 last week. Besides California, Pennsylvania and Minnesota saw sizable gains for a second week. The U.S. Department of Labor's report did not specify the reasons behind the surge in California's jobless numbers, but it mentioned layoffs in Pennsylvania's transportation and manufacturing sectors, as well as layoffs in Minnesota's education sector. We can't rule out that this week's initial jobless claims were disturbed by this factor. The data tends to fluctuate during holidays and school vacations.

Fed's Barkin says more data are needed before rate cuts

Richmond Fed President Tom Barkin said on Thursday that the Fed needs to further clarify the path of inflation before it can cut interest rates.

When asked if the Fed could cut rates once and maintain them at that level, Barkin said it depends on economic data. If current conditions persist, now may not be the best time to provide guidance on the timeline for subsequent policy adjustments.

BOE keeps rates unchanged but hints at approaching rate cut timing

On Thursday, June 20, local time, the Bank of England (BOE) voted 7-2 (the same vote as at its May meeting) to leave interest rates unchanged at 5.25%, in line with market expectations. Deputy Governor Ramsden and MPC member Dhingra thought the central bank should lower rates to 5%.

This is the seventh consecutive meeting that the Bank of England has held steady. Since August 2023, it has been maintaining interest rates at 5.25%.

The monetary policy statement showed that monetary policy needs to remain restrictive for longer, and the policy decision at this meeting was finely balanced.

"Short-term inflation expectations" and wage growth indicators have moderated. CPI inflation is expected to rise slightly in the second half of this year, as declines in energy prices last year fall out of the annual comparison.

Some members argued that key indicators of inflation persistence remain elevated, with particular concerns about the possible second-round effects from services prices, strong domestic demand, and wage growth. However, some members were of the view that the higher-than-expected services inflation in May did not have a significant impact on the overall disinflationary trajectory.

Labor markets have loosened somewhat but remain tight by historical standards. The considerable uncertainty around estimates derived from the ONS Labour Force Survey means that it is very difficult to gauge the evolution of labor market activity.

After the Bank of England's policy statement was released, money market pricing showed a near 50% chance that the bank would cut interest rates in August, up from the previous day.

Data released by the Office for National Statistics (ONS) on June 19 showed that the U.K. Consumer Price Index (CPI) rose by 2% year-on-year in May. This is the first time since July 2021 that the data returned to the 2% target. At the same time, however, core and service inflation in the U.K. remained at high levels, at 3.5% and 5.7% respectively. This is perhaps the main consideration for the BOE to keep the current interest rates unchanged. In addition, the U.K. labor market remains tight, with strong upward momentum in wage growth. In this case, the BOE may need to further observe future inflation developments.

Fed's Kashkari says it may take a year or two to bring inflation to 2%

Minneapolis Fed President Kashkari said on Thursday that the Fed will bring inflation back to its target level of 2%, but this could take a year or two. The path of interest rates will depend on the economy, and the fundamentals of the U.S. economy are very healthy and strong at the moment. Kashkari hopes that it will continue. There is some evidence of some softening around the margins.

U.S. new home construction falls to the slowest pace in four years

Data released on Thursday showed that U.S. new home starts fell 5.5% in May to an annualized total of 1.277 million, below market expectations. The monthly rate of building permits, which signal future construction, also dropped by 3.8%. Multifamily and single-family home starts and permits generally declined. Overall, new housing starts slipped to their slowest pace in four years in May as rising interest rates caused the housing sector to lose momentum earlier this year.

[Focus of the Day]

UTC+8 14:00 U.K. Retail Sales MoM (May)

UTC+8 15:15 France SPGI PMI Prelim (Jun)

UTC+8 15:30 Germany SPGI PMI Prelim (Jun)

UTC+8 16:00 Eurozone SPGI PMI Prelim (Jun)

UTC+8 16:30 U.K. SPGI PMI Prelim (Jun)

UTC+8 21:45 U.S. SPGI PMI Prelim (Jun)

UTC+8 22:00 U.S. Annual Total Existing Home Sales (May)

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Cohen

Economic

The threat of China slapping tariffs on the European Union’s pork is the last thing the continent’s beleaguered industry needs.

China, the world’s biggest pork consumer, this week announced a probe on imports from the EU that could result in tariffs as part of a trade tit-for-tat. The bloc’s top exporters of the meat — like Spain and Denmark — warn that any levies will further hit overseas sales that have been falling for several years, hurting the entire supply chain from farmers to processors.

The EU is already losing its crown as the No. 1 pork exporter. After benefiting from demand in China when African swine fever ravaged herds, European shipments have struggled as Chinese output rebounded and the bloc had its own outbreaks of the disease. Farmers’ profits have also been squeezed by higher feed and energy costs and consumers eating less pork, prompting processors to cut jobs, close slaughterhouses and target more local markets.

The pork probe is the latest retaliation in a spat that has also included Chinese electric vehicles and European brandy. If tariffs do come in, EU hog suppliers may also find it hard to find new markets for niche products — such as pig ears — that China buys.

“We are becoming hostages in a trade war we aren’t even really part of,” said Danish pig farmer Torben Farum, who counts China as a buyer of his products. “We actually have enough to contend with and then this just comes on top.”

China imported 930,000 tons of pork and pork offal products — worth $1.86 billion — from around the world in the first five months of year, customs data show. Spain, Denmark and the Netherlands were among the biggest suppliers.

China’s Pork Probe Is Yet Another Blow for Struggling EU Farmers_1

While overall European pork exports have dropped in recent years, China remains a crucial buyer for the EU as its single biggest overseas market for the meat. But China has needed to import less as its herd recovers, with sluggish consumption amid an economic downturn adding to an oversupply there.

For now, pork and offal products from Europe are clearing customs normally, according to industry sources who are closely watching the situation. Even so, some traders in China are now snatching up frozen pork product stocks at ports and in warehouses amid worries that any future trade measures against EU shipments could push up prices of those products, industry sources said.

If the year-long probe does lead to duties, that could benefit rival exporters like the US and Brazil, whose supplies are already competitive in China. Total US shipments in 2024 are forecast to be on par with the EU.

China’s Pork Probe Is Yet Another Blow for Struggling EU Farmers_2

It’s unclear how quickly China’s probe will progress. The investigation means companies have to register with Chinese authorities, and they may be questioned by Beijing before any decision is taken on potential tariffs, said Anne Richard, director at French industry association Inaporc.

“For now, we are in waiting mode,” she said. “It will be complicated to replace China in the short term, as it’s our No. 1 market.”

A Ministry of Commerce spokesman on Thursday said China has the right to launch anti-dumping measures after the release of preliminary results, in accordance to related domestic and World Trade Organization rules.

China has targeted agricultural trade before. It lifted punitive tariffs on Australian wine exports this year, signaling an end to a three-year campaign of trade pressure on Canberra that also included barley. It also imposed lengthy restrictions on US poultry that affected companies such as Tyson Foods Inc. and Pilgrim’s Pride Corp., before lifting a ban on shipments in 2019.

Finding New Buyers

A key concern for many European suppliers is finding alternative markets to send offcuts of carcasses such as trotters, snouts, ears and head meat, said Miguel Angel Higuera, director of Spanish pig-farmers group Anprogapor.

Last year, China accounted for 65% of the 3.2 billion kroner ($460 million) worth of by-products Denmark exports, according to the Danish Agriculture and Food Council.

“When my pigs go to the slaughterhouse, they are being cut up and then — roughly speaking — the bacon goes to England, the ham goes to Italy, the snouts, ears and tails go to China, and the pork roast we’ll eat here in Denmark,” Farum said. China’s Pork Probe Is Yet Another Blow for Struggling EU Farmers_3

China’s Pork Probe Is Yet Another Blow for Struggling EU Farmers_3

Selling those niche products to nations like China helps European processors keep costs down by spreading them out across the whole carcass. If those offcuts are instead sold at lower prices in smaller Asian markets or for pet food, then production costs will be passed onto premium cuts sold in Europe, said Rupert Claxton, meat and livestock director at consultancy Gira.

Any drop in demand is expected to drive carcass prices down. Danish farmer Farum isn’t seeing a decline yet, but he’s nervous about what the probe could mean for his industry.

“It sends a signal to the market and it may make some farmers reconsider if they want to continue or not,” he said.

Source:Bloomberg

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Cohen

Cryptocurrency

The German government is starting to sell its sizable stash of Bitcoin that was seized from the operators of a movie piracy website, sparking concerns about its potential impact on the cryptocurrency market.

The government has apparently sold over $195 million in BTC within the past 24 hours, according to blockchain analytics firm Arkham, and had moved around even larger sums on Wednesday between multiple wallets.

This significant move follows a recent pattern of large-scale Bitcoin transactions initiated by German authorities, with substantial amounts being funneled to major exchanges such as Coinbase, Kraken, and Bitstamp. That could suggest even more selling to come.

In the latest transactions, the German government transferred $65 million worth of BTC to likely exchange deposits, adding to the $130 million moved yesterday. Despite these massive apparent sales, German authorities still hold a substantial $3.05 billion worth of Bitcoin.

This extensive Bitcoin cache, nearly 50,000 BTC, was originally seized from the operators of Movie2k.to, a film piracy website that was last active in 2013. The Bitcoin was transferred to the German Federal Criminal Police Office (BKA) in mid-January following a voluntary handover from the suspects, per Arkham.

The large-scale sale has already had a noticeable impact on Bitcoin’s market price, according to Robert Quartly-Janeiro, chief strategy officer at crypto exchange Bitrue. He also believes that it suggests a bearish perspective for the German government.

"Having seen a slippage in the price of BTC, the German government is releasing significant tranches of BTC and has taken a view that the price of BTC is to soften for a while to come,” he told Decrypt. “It’s worth remembering that the BTC being sold was seized due to illicit activity, so what’s more interesting is what the German government is planning to do with the capital once sold."

He added that the size of the sale has dragged BTC lower as a result. Bitcoin is down about 0.5% over the past 24 hours to a current price of about $64,700, pushing its 14-day dip to nearly 9% as of this writing. Quarterly-Janeiro believes there’s clearly a strategy at play, and that the timing of the next tranche to be sold will be telling.

“Could they close the position completely? Maybe so," he said.

Ben Kurland, CEO of token management platform DYOR Labs, highlighted the historical implications of such sales in a comment to Decrypt.

"Historically, significant Bitcoin sales by governments lead to immediate price declines and short-term volatility,” he said. “Mid-term effects can vary, however prolonged selling would cause further slumps as negative sentiment grows. It’s wise to exercise caution until the remaining BTC is either sold off or moved off exchanges, as government-held BTC is unlikely to remain on centralized exchanges for long."

The ongoing liquidation by the German government has injected a dose of volatility into the crypto market, with investors and market analysts watching for further movements and potential impacts on Bitcoin’s price.

James Davies, co-founder and Chief Product Officer of Crypto Valley Exchange, told Decrypt that he doesn’t believe that there is “any market sentiment behind” the selling, and that it’s probably “more a function of not holding assets in Bitcoin” with the police department “simply slowly liquidating this seizure.”

In any case, he expects it to be a “boon time for over-the-counter traders,” but will result in “some short-to-medium-term volatility for the rest of us.”

Source:decrypt

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Alex

Economic

Japan's factory activity expanded for a second straight month in June but the pace of growth eased as orders weakened and cost pressures intensified, a business survey showed on Friday.

The au Jibun Bank flash Japan manufacturing purchasing managers' index (PMI) stood at 50.1 in June, down slightly from 50.4 in May, but still above the 50.0 threshold separating growth from contraction on a monthly basis.

"Japan's private sector expansion stalled midway into the year," said Jingyi Pan, economics associate director at S&P Global Market Intelligence, which compiled the survey.

But growth in the manufacturers' output offered some room for optimism, she added.

The key subindex of output expanded in June for the first time since May 2023, the survey showed.

However, an index of new orders dipped in June from the previous month.

The pressure on margins for Japanese firms was concerning, Pan said.

Price pressures strengthened in the manufacturing sector as the average input costs and output prices increased at a faster pace in June than the previous month.

Manufacturers' optimism in the next 12 months rose despite the slowdown in new orders, according to the survey.

Service sector business activity fell in June for the first time in about two years amid subdued new business.

The au Jibun Bank flash services PMI shrank to 49.8 in June from 53.8 in May. The index contracted for the first time since August 2022.

Japanese service providers suggested that output was limited due to labour constraints even as they continued to hire more staff.

The sector's input cost inflation also rose in June but firms raised average charges at the slowest pace in seven months to support sales.

The au Jibun Bank flash services PMI shrank to 49.8 in June from 53.8 in May. The index contracted for the first time since August 2022.

Japanese service providers suggested that output was limited due to labour constraints even as they continued to hire more staff.

The sector's input cost inflation also rose in June but firms raised average charges at the slowest pace in seven months to support sales.

Source:Reuters

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Samantha Luan

Economic

South Korea’s early trade data showed that growth in exports moderated so far this month, cooling a rally that’s boosted optimism over the outlook for economic growth.

The value of shipments increased 8.5% from a year earlier in the first 20 days of June, according to data released Friday by the customs office. That compares with an 11.5% rise for the full month of May. Imports edged down by 0.6%, resulting in a trade surplus of $1.5 billion so far in June.

South Korea’s Early Trade Data Show Softer Export Momentum_1

Continued strength in exports is key to South Korea’s economy, which expanded in the first quarter far faster than expected. The government expects the trade rally to help economic growth narrowly avoid a contraction this quarter versus the previous period, keeping the economy on track for a mid-2% level expansion in 2024.

The customs data showed semiconductor sales rose 50.2% from a year earlier so far this month, continuing to lead the gains in exports as prices pick up thanks to demand from smartphone makers, data-center operators and artificial intelligence developers.

A strong US economy has helped offset slowing demand from China. Exports to the US increased 23.5% from a year earlier in June while those to China rose 5.6%, the customs office said in a statement. South Korea’s Early Trade Data Show Softer Export Momentum_2

South Korea’s Early Trade Data Show Softer Export Momentum_2

South Korean firms are part of a wide range of global supply chains, especially in industries including semiconductors, automobiles and batteries.

Strong exports have had little impact on the moderating trend in domestic prices so far, allowing the Bank of Korea to keep its inflation forecast steady. That opens the room for the central bank to consider a policy easing in the second half of this year.

Headwinds remain for South Korea. Developers continue to struggle with debt that piled up during a pandemic-era construction boom. China, South Korea’s biggest trading partner, has yet to recover fully from a housing slump that continues to weigh on activity.

The exchange rate remains a source of concern as South Korea relies heavily on imports of energy and raw materials to assemble products destined for shipment overseas. The won has been one of Asia’s worst-performing currencies this year.

Export growth normally helps the won appreciate, but growing investment among South Korean retail investors in US markets is lessening the effect while rising tensions with North Korea further weigh on the won, said Ryu Jinlee, an economist at SK Securities.