Federal Reserve Chairman Jerome Powell will face some awkward questions when he testifies to Congress this week.
The Fed’s decision to skip an interest-rate hike last week, leaving borrowing costs unchanged for the first time in more than a year, is a puzzle.
Ostensibly, it’s to allow more time to wait and see the impact of past rate increases. But at the same time, the Fed’s own estimate for how high rates need to go this year has risen. If the forecast is right, why wait?
The impact of past rate hikes is, indeed, unclear. But if anything, it’s surprising how little effect they’ve had. The housing market, for example, seems to have absorbed the blow without collapse. Buyers are coping with higher mortgage rates. Home-builder confidence rose for the first time in 11 months, a report showed Monday. Data on housing starts and sales of existing homes add more color this week.
Unemployment is still historically low—another jobless claims report is due Thursday. And purchasing managers’ indexes, while showing manufacturing is weak, also indicate that services are humming along. Another PMI update is coming on Friday.
What’s more, other central banks are still clearly in hiking mode. Watch the U.K., Switzerland, and Norway with big decisions later in the week.
Inflation, while cooling, is still well above the level the Fed needs it to be.
So why the pause? To be sure, lawmakers will also grill Powell from the other side as well, asking why he’s still raising rates when consumers are already feeling the pinch. And a little bit of inflation may not sound so bad to politicians if the alternative is raising interest rates so high it brings the economy to a screeching halt.
Nevertheless, explaining last week’s decision will be Powell’s biggest challenge.
—Brian Swint
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Congress to Ask Questions About Central Bank’s Pause
Powell heads to Capitol Hill this week to answer lawmakers’ questions about the state of the economy, one week after the central bank paused on further interest-rate increases but signaled rates might have to rise higher than previously expected.
- Powell testifies in the House on Wednesday and the Senate on Thursday. Lawmakers could ask him about the Fed’s pause in light of its forecast that rates will climb to around 5.6% this year, up from a prior forecast of 5.1%. The new estimate implies rates rise another half-percentage point.
- The Fed targets inflation at a 2% annual rate. Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, told MarketWatch the Fed theoretically would need to raise rates another three quarters to one full percentage point to get on that path. He doesn’t think that will happen.
- Powell’s appearance in the House comes on the same day three Fed nominees are scheduled to appear at a Senate confirmation hearing. They include Philip Jefferson, nominee to be Fed vice chairman, Lisa Cook, a renominee for Fed governor, and Adriana Kugler, nominee for governor.
-
Summer is a usually sluggish time for stocks but investors have driven indexes higher in recent weeks on expectations the Fed is nearing the end of its rate increases. The
S&P 500
and
Nasdaq
ended last week on their longest streak of weekly advances in years.
What’s Next: President Joe Biden is leaning on his economic record as he sets off on his reelection campaign. He promised higher wages and more jobs at a union rally last weekend, and plans coming fundraisers in California, Chicago and New York this month.
—Liz Moyer
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China Cuts Rates to Aid Sluggish Recovery
China cut its benchmark lending rate for the first time in 10 months Tuesday to reinvigorate its stalling economic recovery.
- The People’s Bank of China cut its one-year loan prime rate by 10 basis points to 3.55%, lowering its five-year rate by the same amount to 4.2%. However, the move was expected and the market had been waiting for a larger stimulus boost.
- “The aim is to bolster lending, but investors appear a little underwhelmed by the action and are waiting until further moves promised to bolster the economy materialize,” Hargreaves Lansdown analyst Susannah Streeter said.
- Hong Kong’s Hang Seng Index closed 1.5% lower Tuesday, while China’s Shanghai Composite was 0.5% lower.
- Economists at Goldman Sachs lowered their forecasts for China’s economy in a note Sunday, as they said the country’s post-Covid recovery “appears to have fizzled out” in the second quarter. They reduced their 2023 GDP (gross domestic product) growth forecast to 5.4% from 6%, while their 2024 forecast was cut to 4.5% from 4.6%.
What’s Next: The modest rate cut suggests an element of reluctance from China to stimulate demand. But the reality is the world’s second-largest economy is going to need a much larger stimulus package.
—Callum Keown
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What the Paris Air Show Says About Aviation Recovery
Investors will get a read on the post-Covid recovery of the commercial aerospace industry during the Paris Air Show this week. The first biannual show since 2019 runs through June 25 and should move the stocks of commercial aircraft makers such as
Boeing
and its European rival,
Airbus.
- Airlines could order 2,100 planes during the show, CNBC reported. Airbus on Monday announced the biggest plane deal in history: 500 narrow-body jets for Indian carrier IndiGo. Boeing projects $8 trillion in total commercial aircraft spending from 2023 to 2042.
- Boeing’s projection represents the cost of the roughly 42,600 planes that airlines will need between now and 2042. Excluding the roughly 1,800 regional jets in the 2023 forecast, Boeing and Airbus will have to make roughly 2,000 planes a year for 20 years on average to reach that.
- Investors will also hear about sustainability and sustainable aviation fuel made from nonedible plant oils. Reducing carbon emissions in aviation is tricky because no batteries are currently big enough, powerful enough, or light enough to make the equivalent of a 737 Tesla.
- Boeing CEO Dave Calhoun doesn’t think the company needs to develop a new plane this decade. Boeing is expected to deliver about 540 planes this year and 675 in 2024. It expects to start shipping the larger Max10 in 2024, after the Federal Aviation Administration certifies it.
What’s Next: Boeing has announced large orders or preliminary agreements for new planes from
United Airlines,
Saudia, and Riyadh Air. IBA’s chief economist also expects
Delta Air Lines,
Malaysia Airlines, and Air France KLM to be buyers of new aircraft, CNBC reported.
—Al Root and Janet H. Cho
***
Data This Week to Shed Light on Housing Market Recovery
New data this week are expected to shed light on the housing market recovery, including Monday’s home builder housing market index for June, which took the pulse of the single-family housing market. Later this week, the National Association of Realtors will report existing-home sales for May.
-
The home builder housing market index June reading was 55, rising for six-straight months as home builders such as
Lennar
and
Toll Brothers
gained confidence. Analysts expect existing-home sales for May to dip to 4.25 million annualized from 4.28 million in April. - Home purchase loan applications earlier this month gained a seasonally adjusted 8%—the greatest one-week gain since January, the Mortgage Bankers Association said. More first-time home buyers are entering the market, president and CEO Bob Broeksmit said.
- Mortgage rates averaged 6.69% for a fixed 30-year loan as of June 15, Freddie Mac said, sliding for a second-straight week. Mortgage rates are unlikely to surpass last year’s peak of 7.08%, said Robert Dietz, chief economist for the National Association of Home Builders.
- Homeowners with low rates are opting not to move, contributing to a shortage of new listings and lending strength to home prices. Roughly 92% of all homeowners with a mortgage have rates below 6%, a recent Redfin analysis found.
What’s Next: National Association of Realtors’ chief economist Lawrence Yun said his baseline forecast calls for a roughly 10% reduction in home sales this year after dropping 18% last year. Dietz expects mortgage rates over the next several years to fall to between 5% and 6%.
—Shaina Mishkin and Janet H. Cho
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FedEx Report Tonight Seen as Proxy for Consumer Spending
FedEx
reports fiscal fourth-quarter 2023 earnings after the market closes tonight, and investors are viewing the results as a proxy on consumer spending appetites, since shipping trends tend to follow consumer online shopping activity. The story will likely be one of slower package demand.
- The logistics company is in the middle of a $4 billion-dollar cost-cutting campaign by the end of fiscal 2025 to recharge profit. FedEx has previously warned of slowing shipping demand, leading it to consolidate business units, cut flights, and close offices.
- Consumers are paying more for groceries since last year, forcing some to cut back on discretionary purchases. Analysts expect earnings per share of $4.85 compared with $6.87 a year earlier. Sales are expected to dip 8% to $22.5 billion for the fourth quarter.
- Investors are also listening for what FedEx says about guidance. Analysts tracked by FactSet expect full year 2024 earnings per share of $18.33 on revenue of $90.9 billion. Both forecasts are higher than full-year 2023 forecasts.
- It could also update investors about how the recent collapse of a key highway near Philadelphia is affecting operations. The collapse along the I-95 corridor connecting the Northeast to the South closed a stretch of highway that carries 160,000 vehicles a day, 8% of them trucks.
What’s Next: FedEx rival
United Parcel Service
faces potentially disruptive labor issues. Members of the International Brotherhood of Teamsters union overwhelmingly voted to go on strike if a collective bargaining agreement with UPS isn’t reached by July 31.
—Liz Moyer
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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner
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