Economic resilience suggests the Fed has more work to do

Summary

United States: Economic resilience suggests the Fed has more work to do

• Chair Powell noted this week in Congressional testimony that economic activity has been resilient in the face of higher interest rates, suggesting there is more work to be done by policymakers in order to achieve their 2% inflation target. Housing was the dominant theme this week and intimated the housing market is holding up reasonably well in the face of higher interest rates and the potential for recession early next year.

• Next week: Durable Goods (Tue.), New Home Sales (Tue.), Personal Income & Spending (Fri)

International: Bank of England revs up rate hikes

• In the wake of disappointing inflation news in recent months, the Bank of England (BoE) this week decided to deliver a large 50 bps policy rate hike to 5.00%. The BoE's hand was essentially forced by especially rapid inflation in recent months, including a May CPI that quickened to 7.1% year-over-year. We doubt wage or price inflation will cool substantially by the time of the Bank of England's August announcement, and expect the U.K. central bank to deliver another 50 bps rate increase, to 5.50%, at that meeting. Beyond that, we also see a 25 bps hike to 5.75% in September, which we expect to be the peak for the current cycle.

• Next week: Riksbank Policy Rate (Thu.), China PMIs (Fri.), Eurozone CPI (Fri.)

Credit market insights: H8 to see you go, commercial bank loans are declining

• Credit conditions have tightened in the weeks since the advent of turmoil in the U.S. financial sector and giving the Fed more to consider in its deliberations over the future path of interest rates. Recently released H8 data depict a downward trend in the loans and leases of commercial banks in the U.S. during the weeks since these events, driven primarily by a deceleration in C&I loans.

Topic of the week: Chairman Powell reveals a touch of grey

• As mandated by the Federal Reserve Reform Act of 1977, Chair Jerome Powell presented the Federal Reserve's semiannual monetary policy report to the House of Representatives and Senate this week.

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