Top Stories Last Week
• Global Stocks Dropped as Fed May Taper QE
Global financial markets fell for the week, battered by the comments from Federal Reserve Chairman Ben Bernanke about the possibility that the central bank might reduce the stimulus this year. In the week, S&P index dropped 2.0%, and MSCI EAFE index declined 3.1%. The MSCI Emerging Market Index tumbled by 4.9% as market volatility picked up. Gold price declined by 7.0%. The SPGC commodity index was down by 3.4%. The bond markets were sold off significantly. Barclays US Treasury index dropped by 3.1%, and US high yield bonds was down by 2.9%.
• The Fed May Taper QE Later This Year
In his press conference on Wednesday, Fed Chairman Ben Bernanke unveiled his plan for tapering asset purchases, indicating they are expected to begin later this year and end at some point toward the middle of 2014, if and only if the economy accompanies the Fed’s “moderately optimistic forecast.” If things work out as expected over the next six to twelve months, the Fed will begin to draw-down its asset purchases, currently running at a pace of $85 billion a month, and end them at some point next year, when the unemployment rate hits 7%. Effectively, this is the first step in the Fed’s exit policy, and as Bernanke has repeated tirelessly, it is contingent on incoming economic data. It wouldn’t be shrinking the portfolio but slowing the pace at which it grows. But the market ignored him, with equities tanking and bond yields surging.
• US CPI Climbed 0.1% in May
US consumer prices climbed 0.1% in May after falling 0.4% in April and dipping 0.2% in March. The increase came under forecasts made by many economists who were expecting a 0.2% increase. Excluding the more volatile food and energy items from the mix, the so-called core US inflation rate rose 0.2% in May after advancing 01% in each of the two previous months. The increase was led by the cost of shelter such as renting and home prices, which went up 0.3%. Core US inflation gained 1.7% YOY through May. The core rate of inflation is closely watched by the Federal Reserve as it helps decide where the central bank sets its key interest rate. 1.7% remains below the Fed’s 2% inflation target.
• Chinese Manufacturing Activities Continued to Shrink
Activities in China’s vast factory sector decelerated further in June, HSBC survey of Chinese manufacturers showed on Thursday, casting a pall on markets and stoking further concerns over the health of the world’s second largest economy. The China Purchasing Manager’s Index (PMI) fell to a nine-month low of 48.3, worse than the final reading of 49.2 in May when the index moved into contractionary territory for the first time in seven months.
• Chinese Government Signaled No Action on Cash Squeeze
China’s government signaled little respite from the cash crunch that has afflicted its financial system since the beginning of June, suggesting tight conditions could continue to strain markets in the weeks ahead. A commentary published by the official Xinhua news agency said there was no shortage of funds in China’s financial system. Rather, it said, a combination of speculation and nonbank forms of lending often called shadow finance were contributing to the surge in short-term lending rates. China’s interbank market, where banks lend each other money to meet their daily needs, has seen a surge in borrowing costs over the past two weeks. The repo rate reached over 11.7%.
• Brazilians Protested Fare Hikes in Public Transportation
Hundreds of thousands of Brazilians took to the streets in more than 100 cities. The latest wave of sometimes-violent protests are increasingly focusing on corruption and reforming a government system in which people have lost faith. A new poll shows that 75 percent of citizens support the demonstrations. The protests began as opposition to transportation fare hikes, then became a list of causes including anger at high taxes, poor services and World Cup spending, before coalescing around the issue of rampant government corruption. Many protesters were not appeased by a prime-time television address by President Dilma Rousseff, who said that peaceful protests were welcome and emphasized that she would not condone corruption. She also said she would meet with movement leaders and create a plan to improve urban transportation and use oil royalties for investments in education.
Top Stories to Watch This Week
• US Housing Market
April’s S&P Case/Shiller housing index should rise 11.9% YOY according to economists’ forecast. US new home sales in May is expected to be 0.46MM.
• Japanese CPI Inflation
Japan will report May National CPI this week. Investors will look for signs for how well the Abenomics works to reverse the trend of deflation.
• German CPI Inflation
Germany will report CPI inflation. A moderate inflation in Germany will give ECB more freedom to ease monetary policy if needed.