Weekly economic and financial commentary

Summary

United States: Housing Slump Underscores Rising Risk of Recession

• Higher mortgage rates continue to drag on housing activity. The NAHB Housing Market Index plunged 12 points to 55 in July. June brought a 5.6% drop in existing home sales as well as a 2.0% decline in housing starts. Initial jobless claims rose to 251K during the week of July 16. The Leading Economic Index (LEI) slipped 0.8% in June, the fourth straight monthly drop.
• Next week: Durable Goods (Wed.), Q2 U.S. GDP (Thurs.), Personal Income & Spending (Fri.)

International: ECB Exits Negative Interest Rates

• The ECB delivered a larger-than-expected 50 bps Deposit Rate increase, exiting its negative interest rate policy and taking the Deposit Rate to 0.00%. The other key policy interest rates were also lifted by 50 bps, taking the refinancing rate to 0.50% and the marginal lending rate to 0.75%.
• Next week: Japan (Tokyo) Inflation (Thurs.), Central Bank of Colombia (Fri.), Eurozone Q2 GDP (Fri.)

Interest Rate Watch: The FOMC to Deliver Another Jumbo 75 bps Hike

• The blistering June CPI report raised the chance that the FOMC could deliver a 100 bps hike at next Wednesday's meeting. However, with data since then showing the economy continues to cool and notable hawks signaling a smaller increase should be adequate, we look for the FOMC to hike a still head-turning 75 bps.

Credit Market Insights: Stronger Dollar Spells Potential Trouble for Emerging Market Debt

• Over the course of 2022, but particularly during the past few months, the U.S. dollar has broadly strengthened. Local currency depreciation could mean potential trouble for governments that have a sizable percentage of their sovereign debt denominated in U.S. dollars. As vulnerable countries struggle with potential repayment issues, economic growth across the emerging and developing world could slow sharply, while the probability of default could spike across the entire spectrum.

Topic of the Week: Power Struggle: European Heat Waves Strain an Energy-Starved Continent

• The second heat wave of this summer swept through Europe this week, extending as far north as the U.K. and causing wildfires in France, Spain, Portugal and Italy. The intensity of the heat wave, with temperatures reaching a record high of 104°F in the U.K., has upended life and further strained a continent already dealing with an energy crisis.

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