Market Updates – July 2

Leaders of the world’s top central banks convened at the annual ECB conference in Sintra, Portugal on Wednesday, focusing on their strategies to address persistent high inflation while avoiding recessions. The heads of the Bank of England, Federal Reserve, and European Central Bank (ECB) emphasized the necessity of further policy tightening to effectively tackle price pressures.

Despite recognizing the ongoing challenges in the global economy, central bank leaders expressed optimism that they can achieve their inflation-fighting objectives without triggering recessions. Statements by U.S. Federal Reserve Chairman Jerome Powell and ECB President Christine Lagarde indicated that their respective efforts to alleviate inflationary pressures are still a work in progress.

During the conference, Powell affirmed the potential for consecutive interest rate hikes by the Federal Reserve, while Lagarde confirmed expectations for a ninth consecutive rise in eurozone rates in July. Lagarde also acknowledged the possibility of a recession in the eurozone economy this year but clarified that it was not the ECB’s base expectation, highlighting the importance of tangible evidence demonstrating stabilization and a downward trajectory of underlying inflation, particularly domestic prices.

Although the Federal Reserve opted to maintain interest rates unchanged this month, market expectations suggest a potential rate increase in the coming months, potentially in the next month or in September, followed by rate cuts next year. Powell underscored that current monetary policy might not be restrictive enough and emphasized the need for a prolonged period of restrictive measures.
On Friday, the change in the Personal Consumption Expenditures (PCE) Price Index, which serves as a measure of inflation in the US, declined to 3.8% on a yearly basis in May from April’s 4.3%, falling short of the market’s 4.6% expectation. Meanwhile, the annual increase in the Core PCE Price Index, the Federal Reserve’s preferred inflation gauge, slightly decreased from 4.7% to 4.6% during the same period.

Among the Group of Seven (G7) wealthy nations, the Bank of England faces the highest inflation rate. Market projections indicate that the Bank Rate could rise from the current 5% to 6.25% by year-end. Additionally, recent data confirmed marginal growth of 0.1% in the UK economy in the first quarter of 2023, leaving output lower than pre-COVID-19 levels.

In the eurozone, inflation has seen a decline surpassing expectations, primarily due to declining energy prices. Consumer prices in the euro area rose by 5.5% in the year leading up to June, down from May’s 6.1%. While slightly lower than economists’ projections of 5.6%, it remains significantly higher than the European Central Bank’s target of 2%.