Inside HQ2 on the grand opening of Amazon HQ2 in Arlington, Virginia, on June 15, 2023.
Amanda Andrade-Rhoades | The Washington Put up | Getty Photographs
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What you might want to know right now
BOE’s supersized shock hike
The Bank of England raised interest rates by 50 basis points, bringing rates to 5%. Markets were betting on a 25-basis-point hike. But May’s inflation reading for the U.K. was a scorcher: Inflation last month remained unchanged from April, while core inflation actually rose from 6.8% to 7.1% year over year. If inflation remains stubborn, expect more surprises from the BOE.
Capital requirements hike
On the second day of his Senate testimony, Federal Reserve Chairman Jerome Powell said new regulations aren’t likely to apply to banks below $100 billion in assets. Those rules would increase the amount of capital banks need to maintain, among other conditions. Separately, FDIC Chair Martin Gruenberg said the rules are expected to kick in next year.
Uneasy EU-China relationship
Europe wants to reduce its economic dependency on China. That is to say, the bloc wants to diversify its supply chains, rely less on demand from the Chinese market and woo foreign investment from other places. However, the euro zone is wary of retaliation from Beijing — such as the country blocking exports from Lithuania — according to a senior EU diplomat who did not want to be named.
U.S. markets mostly rose Thursday, as the S&P 500 and Nasdaq Composite snapped their three-day losing streak, while the Dow Jones Industrial Average remained virtually unchanged. Asia-Pacific markets, however, fell across the board Friday, with all major indexes losing around 1% as of publication time. Japan’s Nikkei 225, in particular, sank up to 2% as the country’s headline inflation rate dropped from 3.5% in April to 3.2% in May.
[PRO] Bearish market, overvalued stocks
Even with the recent rally in the S&P 500, the index is still trying to climb beyond the high it reached in January 2022 — which would usher in an official bull market. Yet market strategists from UBS and JPMorgan Chase and are already warning that the stock market may be overvalued.
The bottom line
Investors have been lulled by a sense of security that inflation in the U.S. is falling, albeit slower than hoped, and interest rates will gradually fall as the beast is slayed. That’s the engine behind markets’ astounding rally in recent weeks.
But investors are being rudely returned to a world they thought they had put behind them — a world, in other words, of continual rate hikes. Fed Governor Michelle Bowman thinks “additional policy rate increases will be necessary” — to the extent that they are “sufficiently restrictive” — so that inflation will drop further. Bowman, who is on the Federal Open Market Committee, essentially echoed Powell’s Wednesday comments that more rate hikes are necessary despite June’s pause. (“Pause” is a word Powell dislikes, by the best way, which sheds gentle on how the Fed is considering.)
The prospect of extra hikes is perhaps why buyers are fleeing to expertise shares. Amazon, Apple and Microsoft all climbed yesterday. It sounds opposite, I do know. Do not tech shares, depending on progress, undergo essentially the most from excessive rates of interest, which erode the worth of future earnings?
My sense is that buyers see synthetic intelligence as a moat round earnings, a barrier which charges can not encroach. Nicely, that is the hope, anyway.
Nonetheless, pleasure over AI won’t be sufficient to maintain the entire market. Regardless of including near 1% Thursday, the Nasdaq is on observe to interrupt its eight-week successful streak. Likewise, the S&P’s 0.37% achieve is perhaps too little to protect its 5 consecutive weeks of closing within the inexperienced.
Some analysts hoped that bullish markets would cost ahead, seeing crimson. However the hue in sight now appears much less a matador’s crimson cape than traffic-halting crimson lights.
Correction: This text has been up to date to right the date of the S&P’s all-time excessive.