Weekly economic commentary: It may be hot outside, but inflation is finally cooling

Summary

United States: It may be hot outside, but inflation is finally cooling

• According to the Federal Reserve's preferred gauge, core inflation cooled to its softest pace in more than three years in May against a backdrop of measured consumer spending and still-strong personal income. Elsewhere, the effect of higher rates remains evident in uninspiring data on capital investment and the housing market.

• Next week: Construction Spending (Mon.), ISM Manufacturing (Mon.), Employment (Fri.)

International: Bird food: Some dovish central bank rate holds amid lighter global data week

• Although this week's central bank decision lineup was somewhat lighter than last week's, multiple institutions delivered updates to their monetary policy assessments. Sweden's Riksbank delivered a dovish policy rate hold. In Mexico, Banxico held rates steady at 11.00% and offered commentary consistent with our outlook for cautious central bank easing.

• Next week: China PMIs (Sun.), Japan Tankan Survey (Mon.), Eurozone CPI (Tue.)

Interest rate watch: QT gradually putting upward pressure on money market rates

• The FOMC has left its main policy tool, the federal funds rate, unchanged for nearly a year as it awaits further progress on bringing inflation back down to 2%. However, the Federal Reserve continues to reduce the size of its balance sheet as part of its quantitative tightening (QT) program. Ongoing QT is gradually starting to put upward pressure on money market rates, such as the Secured Overnight Financing Rate (SOFR).

Credit market insights: Strong net worth gains cloud slowing growth in cash

• Household net worth climbed to new highs across all wealth cohorts in Q1. Most of household wealth is tied up in relatively illiquid assets such as corporate equities and real estate. How are liquid “cash” assets holding up for households relative to pre-pandemic and over the past year?

Topic of the week: Yen reaches its weakest level against the greenback since 1986

• This week, the yen reached its weakest intraday level against the greenback since 1986. The currency's dramatic slide over the past few years has spurred Japan's Ministry of Finance to intervene a couple of times. Will Japan continue to intervene, and how long can it do so?

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