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Economic Indicators

Instead View: Fed hikes rates by 0.75 percentage point, flags slowing economy

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2/2

© Reuters. The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, D.C., U.S., June 14, 2022. REUTERS/Sarah Silbiger

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NEW YORK (Reuters) – The Federal Reserve on Wednesday raised its target interest rate by three-quarters of a percentage point on Wednesday to stem a disruptive surge in inflation, and projected a slowing economy and rising unemployment in the months to come.

The action raised the short-term federal funds rate to a range of 1.50% to 1.75%, and Fed officials at the median projected the rate increasing to 3.4% by the end of this year and to 3.8% in 2023 – a substantial shift from projections in March that saw the rate rising to 1.9% this year.

STORY: FED STATEMENT:

MARKET REACTION:

STOCKS: U.S. stocks rose sharply in wake of the Fed hike.

BONDS: U.S. Treasury yields rose after the Fed statement.FOREX: The dollar index gained after Fed decision.

COMMENTS:

SAM STOVALL, CHIEF INVESTMENT STRATEGIST, CFRA RESEARCH, NEW YORK

“The Fed made its policy change and the markets actually took that information and pretty much sold off on it. But once the Fed chairman said that there could be a similar 75 basis point increase at the next meeting, that’s when the market rose. It is sort of a vote of confidence that the Fed is finally awake to the inflation problem and is willing to take a more aggressive stance.””Markets tend to flip flop a lot after the Fed makes an announcement and many times make a sharp move downward followed by a sharp move upward. But what I believe is that we are likely to be going through a near term relief rally sparked by an increasingly aggressive monetary policy, with the Fed raising rates by 75 basis points and basically saying they could do the same thing at the next meeting in an attempt to corral surging inflation.”

JASON WARE, CHIEF INVESTMENT OFFICER FOR ALBION FINANCIAL GROUP, SALT LAKE CITY, UTAH

“They are doing what they can in a fast moving economy. Things are moving quickly, the Fed knows they are behind the curve and they are attempting to drive down inflation and the tools at disposal are blunt instruments.”

“They reiterated they are willing to do whatever it takes to bring inflation down. We have to give (Powell) a little slack given how difficult things are.”

“As far as the economy and our view on recession – the risk in 2022, its quite low, but certainly in 2023 and into 2024 the risk of recession has risen over the last 3 plus months due to the threat of a Fed policy mistake.”

“The most interesting data point today is the dissent from Esther George. She’s not gun-shy about raising rates. And here she is saying 50 bps is enough for now. She’s looking at this notion that we were behind the curve on inflation, we should have been dealing with this a year ago and now we are hiking aggressively into a slowdown.”

MAURICIO AGUDELO, HEAD, FIXED INCOME, HOMESTEAD FUNDS, ARLINGTON, VIRGINIA

“They are full speed ahead. At this point, when you look at oil prices and gasoline futures, they need to tackle headline inflation. They are still playing catch up at this point. If you look at the dot plot from December, the federal funds rate was going to be just under 1% for the end of ’22. Now we have revised those expectations upward to a terminal rate of 3.4% by the end of this year. When I look at market pricing of future expectations for the December meeting, the implied rate is right around 3.7%. The door is still open to do more, especially at the July meeting and perhaps at the September meeting.”

“Look how fast we adjusted expectations from 50 basis points to 75 basis points in a matter of days. I think at this point all options are at the table.”

ELLEN HAZEN, CHIEF MARKET STRATEGIST, F.L.PUTNAM INVESTMENT MANAGEMENT, WELLESLEY, MASSACHUSETTS

“People are parsing through the statement, parsing through the summary of economic projections (SEP) and taking a look but in general not too surprising. The bigger takeaway from the SEP for me is the runway for them to have a soft landing just got shorter and narrower, meaning that they are anticipating higher inflation, they are anticipating higher unemployment, they are anticipating lower GDP and the Atlanta GDPNow forecast has gone to zero. So whether or not we can escape this without a recession is coming into question. Everyone knew it, but now the Fed is admitting it.”

“Most of the incremental data points have been negative, even this morning the retail sales numbers were soft so just in the last four business days you’ve had a number of negative economic numbers.”

STEPHEN MASSOCCA, SENIOR VICE PRESIDENT, WEDBUSH SECURITIES, SAN FRANCISCO

“I don’t view it as surprising if you’ve been paying attention. The Fed did the right thing – they cited early on that they were going to be more aggressive at this meeting. When you look at the market’s reaction, nobody was really surprised.”

“I think it’s too much, too quick, too fast, too far. A lot of this inflation in my view is being driven by energy prices and at some point oil stops going up.”

PETER YI, DIRECTOR, NORTHERN TRUST ASSET MANAGEMENT, CHICAGO

“The market had fully priced in that 75 but because of how aggressively the market recalibrated their expectations over the last three trading days the market was essentially giving them a green light. The Fed may be thinking they needed to be opportunistic and saw this a window or to establish better credibility to address  inflation and I think that comes at the cost of their forward guidance credibility. And if I had to guess, Esther George probably dissented as it’s going to be difficult to give forward guidance and it’s going to be interesting to see how Powell is going to address that forward guidance, as that’s something they’ve have been hanging their hat on.”

BRAD McMILLAN, CHIEF INVESTMENT OFFICER FOR COMMONWEALTH FINANCIAL NETWORK, WALTHAM, MASSACHUSETTS

“The Fed is trying to respond to legitimate concerns about inflation … What they did today was the least they could’ve done to maintain any kind of credibility.”

“It doesn’t solve the Fed is behind the curve argument. It just brings them one step closer to catching up with the curve.”

“At this  point the Fed is trying to catch up without upsetting markets too much. When we get into the press conference we’ll get more color as to what’s going on.”

MICHAEL ROSEN, CHIEF INVESTMENT OFFICER AT ANGELES INVESTMENT ADVISORS, SANTA MONICA

“To some degree, we’re seeing a bit ‘buy the rumour’, ‘sell the news’. We started this morning with big rallies in stocks and bonds, and that with the 75-bps move priced in. When the announcement comes in, we’re bouncing around a little.”

“The Fed is in a very difficult position that frankly, they put themselves in by mishandling monetary policy and allowing inflation to rise as much as it has. There’s just simply no sign that inflation is turning and this is happening at a time when some of the economic data is weaking – retail sales data this morning, for example. The so-called ‘soft landing’ is looking more and more tenuous.”

“I hope Powell is probed on the balance between the dual mandate of keeping low inflation and high employment. That’s a balance that seems to be getting harder and harder to accomplish.”

“We have been holding short duration in our portfolio for both stocks and bonds and for fixed income we’ve made it even shorter, we’ve shifted from a growth to value bias in equities and we’re holding a lot more cash than we were earlier. I think holding shorter duration and more cash is the way to go right now.”

KATHY LIEN, MANAGING DIRECTOR, BK ASSET MANAGEMENT, NEW YORK

“The Fed took a pretty aggressive move and hiked by 75 basis points. We’re seeing quite a bit of volatility in FX, which is not a surprise considering that there tends to be a lot of two-way action before Powell speaks, but what you can see is that the lack of a positive reaction in the dollar – we had a knee-jerk rally and then now we’re pulling back – is a reflection of the market’s heightened concerns about recession.”

“Thats the greatest risk of the big move the Fed made today and in an environment on a day when retail sales missed in a very big way, I think there’s going to be a lot of recession talk and I think Powell is probably going to lay the groundwork for further tightening and between what we’re seeing in terms of the yield increase already, along with the trajectory of further rises and data already softening, there is going to be a much more significant focus on the shift from inflation to recession.”

SIMON HARVEY, HEAD OF FX ANALYSIS, MONEX EUROPE, LONDON

“Today’s decision comes on the back of a hot U.S. inflation report for May, which prompted increased speculation on Monday that the Fed would abandon its previous signaling of back-to-back 50-bpS hikes in favor of a more aggressive move. Whether or not the Fed chose to prime markets by leaking information to the Wall Street Journal or not is largely irrelevant at this point because the market went all-in on the prospect of a larger rate hike.”

“By standing by its original forward guidance, the Fed would have had to effectively loosen financial conditions when hiking by 50-bps at a time when inflation pressures were mounting. With the announcement largely baked into money market pricing, for both the latest decision and the adjustment in the dot plot, the reaction in financial markets was limited. The emphasis now completely shifts to Chair Powell’s commentary in the press conference as markets try to gauge the Fed’s sensitivity to incoming inflation prints following their latest U-turn and what the FOMC’s appetite is for aggressively taking rates above neutral this year.”

JAKE DOLLARHIDE, CHIEF EXECUTIVE OFFICER, LONGBOW ASSET MANAGEMENT, TULSA, OKLAHOMA

“The market doesn’t know what it wants. It wants higher interest rates to stave off inflation, but it also realizes higher interest rates make the cost of doing business more expensive. So it’s really a crap show, it’s not fun right now.”

“I wouldn’t be surprised if they go with 75 basis points again July, and then they kind of sit back and wait.”

CHRISTOPHER C. GRISANTI, CHIEF EQUITY STRATEGIST, MAI CAPITAL MANAGEMENT, CLEVELAND, OHIO     “This is going to be a buy on the rumor, sell on the news kind of day. The market was strong today, but now that the results have come out and it’s up 75 basis points, which had become the consensus, people are looking forward, seeing more difficult markets ahead and they’re selling off this morning’s rally.”

“We think the Fed funds rate will approach 3.5% by year end, so another 200 basis points of hikes from here. Still not the end of the world, it’s far below the average Fed funds rate of the last 40 years. But what I’d also point out is while it doesn’t necessarily have to end in recession, it’s harder and harder to think that even the 350 basis points will stop the inflation that we’re seeing now.”

BRIAN JACOBSEN, SENIOR INVESTMENT STRATEGIST, ALLSPRING GLOBAL INVESTMENTS, MENOMONEE FALLS, WISCONSIN

“The Fed is willing to let the unemployment rate rise and risk a recession as collateral damage to get inflation back down. This isn’t a Volker-moment for Powell given the magnitude of the hike, but he is like a Mini-Me version of Volcker with this move.”

Economic Indicators

Italy says can exceed 3.1% growth target for 2022 despite energy prices

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© Reuters. FILE PHOTO: People walk along the Galleria Vittorio Emanuele II shopping mall in Milan, August 25, 2015. REUTERS/Flavio Lo Scalzo

ROME (Reuters) – Italy’s Treasury said the country’s economy could grow this year by at least as much as Rome’s official target of 3.1% set in April, despite the negative impact of surging energy prices.

Italy grew 0.1% in the first quarter from the previous three months, national statistics bureau ISTAT said last month, revising up a preliminary estimate of a 0.2% contraction.

This left Italy with so-called “carryover” growth of 2.6% this year, assuming gross domestic product was flat in the remaining three quarters, ISTAT said.

Announcing on Monday the bond issuance programme for the third quarter, the Treasury said it expected growth to accelerate in the second quarter, compared with the first three months.

This still makes it plausible to reach or exceed the 2022 growth target of 3.1%, it said in its debt issuance report.

Prime Minister Mario Draghi’s government in April revised down its 2022 economic growth forecast to 3.1% from a 4.7% projection made last September.

The government has budgeted since January more than 33 billion euros ($34.90 billion) to soften the impact of sky-high electricity, gas and petrol costs.

($1 = 0.9456 euros)

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Economic Indicators

French consumer confidence falls more than expected in June

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© Reuters. A woman shops at a fruit and vegetables shop in Paris, France, June 10, 2022. REUTERS/Sarah Meyssonnier

PARIS (Reuters) – French consumer confidence fell more than expected in June, hitting a near nine-year low as concerns about the economic outlook surged in the face of high inflation and political uncertainty, a survey showed on Tuesday.

The INSEE official statistics agency said its consumer confidence index fell to 82 in June from 85 in May and the lowest level since July 2013.

A Reuters poll of 14 economists had an average forecast of 84 with the lowest estimate for 83.

Although households’ concerns about future inflation remained well above the long-term average, they eased in June for the third month in a row.

However, household sentiment about the general economic outlook continued to worsen, falling to the lowest level since May 2020 when France was in the second month of its first and most strict COVID-19 lockdown.

While surging inflation has stressed households in recent months, France’s political situation has added to uncertainty about the economic outlook since President Emmanuel Macron’s party lost its ruling majority in legislative elections this month.

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Economic Indicators

Peru truckers, farmers to strike over fuel and fertilizer costs

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© Reuters. FILE PHOTO: People walk next to parked trucks during a national transportation strike against fuel prices, in Lima, Peru March 18, 2021. REUTERS/Angela Ponce/File Photo

By Marco Aquino

LIMA (Reuters) – Peru’s truckers and some farm groups will go on strike on Monday after failing to reach agreements with the government seeking measures to reduce the impact of steep global price rises of fuel and fertilizer, sector leaders said on Sunday.

Union leaders met on Friday and Saturday with government representatives, with demands including considering freight transport a “public service” that would reduce costs and curb competition from truckers from neighbor countries.

“We are firm in plans to strike with all our bases nationwide,” the leader of the heavy load haulage and drivers union Marlon Milla told radio station RPP. The union has 400,000 cargo transport units in 14 of the 25 regions of the country.

High global fuel prices linked to Russia’s invasion of Ukraine have stoked unrest in Peru, the world’s No. 2 copper producer, while shortages of fertilizer have raised fears over food supply with the government struggling to secure shipments.

The government of leftist President Pedro Castillo, who has seen his popularity tumble since taking office last year, has taken measures to curb the rising cost of living, but the annual inflation rate remains at around 8%, its highest level in 24 years.

Some farming unions also announced strikes on Monday, in protest at the rise in fertilizer prices and shortages.

Latin American leaders are grappling to bring down spiraling prices despite major interest rate hikes. Trucking protests over fuel costs have hit Argentina while Ecuador is being roiled by protests in part linked to gas prices. [L4N2YB27W]

“The dialogue has not been exhausted, we are in a permanent session of ministers to avoid protest,” Justice Minister Félix Chero told reporters on Sunday. The government is offering subsidies for road tolls and fertilizer costs.

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