Weekly Wisdom – July 27, 2023

By Hightower Great Lakes on July 27, 2023

Fed Hikes 25 bps

The Fed raised its fed funds target rate an additional 25 bps during the July FOMC meeting. The fed funds rate is now 5.25-5.5%, a 22-year high. This decision was largely anticipated since the June FOMC meeting suggested that Fed officials believe more work is needed to completely tame inflation. It has made solid progress, which can be seen below in Chart 1.

But the Fed’s fight is not over yet, as it maintains its 2% inflation target. The next FOMC meeting is scheduled for September 20, 2023, and there will be a lot of new data to sift through in the meantime. We will gain some insight into the thought process of Chairman Powell in late August, during the Jackson Hole Economic Symposium.

Chart 1: Core CPI vs. Fed Funds Rate[1]

The Atlanta Fed’s GDPNow model is forecasting 2.4% GDP in Q2 2023, unchanged since the July 19 reading. The preliminary Q2 GDP report is Thursday, July 27.

The Fed remains data dependent. We believe that the press conference sounded more moderate versus the hawkish expectations. The Fed will continue to watch the data before making decisions. Chairman Powell mentioned the Fed has two CPI reports, two NFP reports, 2Q ECI and two Core PCE reports to sift through before its next meeting in September.

Core inflation remains a top priority for the Fed; Chair Powell mentioned that while “FOMC wants core inflation to come down, it is still elevated.” The overall message today was that the Fed is neither dismissing nor confirming the possibility of another rate hike. Rates will remain higher for longer.

Monetary Policy Crosscurrents

The European Central Bank (ECB) has implemented similar policy this year to the U.S. Fed. Within the last year, the ECB has raised rates 400 bps, resulting in a 3.5% top lending rate.[2] The ECB is expected to continue to hike rates another 25 bps at its meeting on July 27. Neither the U.S. nor the EU have experienced interest rates this high in 22 years. On the other end of the monetary policy spectrum is the Bank of Japan (BOJ).

The BOJ remains a major outlier in its monetary policy, despite pressure from the International Monetary Fund (IMF). The BOJ has maintained its monetary easing policy as others have tightened, even amid an upside risk to Japan’s price inflation. The BOJ has maintained its -0.1% short term interest rate target as well as a 0% cap on its 10-year bond. The BOJ is patient and sticking to its longstanding stimulating policy despite inflation running over its 2% target for 13 months in a row.[3]

Chart 2: U.S. Fed Fund Rate vs. Euro Zone Policy Rate vs. Japan Policy Rate[4]

Finally, there is China’s monetary stance. The Politburo is China’s primary decision-making council, headed by President Xi Jinping.[5] The market has been looking for China to continue to ease its monetary policy since it cut its reserve requirement ratio for all banks by 25 bps (excluding banks with a 5% reserve ratio), back in mid-March.[6]

The reserve requirement ratio is the percentage of deposits that a bank must keep on hand, opposed to investing the funds or lending them out.[7] This reserve requirement ratio cut has been followed by multiple other economic actions in June, including all of China’s large banks cutting demand deposit interest rates by 5 bps to 0.2%.[8]

This deposit interest rate cut was then followed by a 10 bps cut in China’s seven-day reverse repurchase rate, which is now at 1.9%, resulting in 2 billion Chinese yuan being released into the country and China’s 10-year government bond falling by 4 basis points.[9] The most recent development is that the Chinese Communist Party’s Politburo met on July 24 to discuss the state of Chinese economic policy yet again.[10]

This meeting confirmed that there will be more help for the Chinese property sector, but there likely will not be a large inflow of stimulus that some hoped for.[11] The current goals of this Chinese decision-making body are to promote growth within this post-Covid lockdown period and keep the Chinese Yuan steady. China’s property sector accounts for about 25% of its economy, a crucial component to its total GDP growth.[12]

One tool that China has used to directly influence the property sector is extending special loans to housing developers to finish pre-sold housing projects. Recently, China decided to extend the deadline on $28 billion worth of loans to May 2024, which were originally supposed to be repaid by the end of March 2023. So far, the loans are not helping much, with Chinese property investments falling by 20.6% in June y/y, preceded by a 21.5% contraction in May.[13]

Increased Labor Actions

We have also been keeping an eye on the pending labor union strikes. Labor unions have been more demanding of their employers in hopes to achieve better wages and benefits for their members. This theme is becoming more widespread, hitting multiple sectors of the economy.

Luckily on July 25, 2023, we got news that the Teamsters union, which represents 340,000 UPS workers, reached a preliminary labor deal that includes raises for both full- and part-time workers.[14] Current workers will get $2.75 more an hour this year and $7.50 an hour more during their 5-year contracts. This agreement avoided a strike that otherwise would have begun next week with widespread economic implications, considering UPS is a major partner of the retail industry.

UPS isn’t alone in this conversation. On July 15, 2023, United Airlines reached a preliminary 4-year labor deal with their pilots, which raised their salaries up to 40% over the next four years.[15] Simultaneously, American Airlines flight attendants are now voting on whether they want to authorize a strike, for which we will find out the result later this summer. [16] Increased wages are great for consumers around the U.S., but they do impact companies’ margins and bottom lines. Wage inflation is also a significant factor for the Federal Reserve, which is trying to lower inflation to its 2% target. 

Click here to read last week’s Weekly Wisdom (7/20).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (Chart). As of July 18, 2023.

[2] Source: Reuters. As of July 24, 2023.

[3] Source: Reuters. As of June 16, 2023.

[4] Source: FactSet (Chart). As of July 18, 2023.

[5] Source: Bloomberg. As of July 24, 2023.

[6] Source: CNBC. As of March 17, 2023.

[7] Source: Investopedia. As of January 17, 2022.

[8] Source: CNBC. As of June 8, 2023.

[9] Source: CNBC. As of June 12, 2023.

[10] Source: Nikkei. As of July 24, 2023.

[11] Source: Reuters. As of July 25, 2023.

[12] Source: Reuters. As of July 17, 2023.

[13] Source: Reuters. As of July 14, 2023.

[14] Source: CNBC. As of July 25, 2023.

[15] Source: CNBC. As of July 15, 2023.

[16] Source: NBC.  As of July 18, 2023.