U.S. Fed reveals more hikes on the way

Author: Portfolio Specialist Group

June 18, 2018

AGF Weekly Perspectives

“A recap of last week’s top economic news and what’s to come”

Fed projects four hikes in 2018

  • The U.S. Federal Reserve (Fed) increased their key policy rate for the seventh time since the Great Financial Crisis, bringing the Fed’s benchmark rate to a range of 1.75% to 2%.
  • Fed Chairman Jerome Powell expressed confidence, saying “the U.S. economy is in great shape” thanks to GDP growth, strong labour conditions and a pickup in household spending.
  • The Fed’s closely watched dot plots revealed two more hikes are now expected before the end of the year, increasing 2018’s total to four.

European Central Bank announces end date for QE

  • The European Central Bank outlined plans to end its quantitative easing (QE) program, while also holding interest rates unchanged at its latest meeting. The central bank will continue with monthly asset purchases of €30 billion until September, then reduce to €15 billion through December, before closing out purchases to start 2019.
  • President Mario Draghi was somewhat cautious in presenting the plan, however, stating reductions are conditional on “incoming data confirming the Governing Council’s medium-term inflation outlook”.
  • Draghi also downplayed any imminent rate hikes following the end of stimulus measures, saying interest rates are expected to remain unchanged “at least through the summer of 2019”.

U.S. inflation moves higher

  • U.S. inflation rose 0.2% to a 2.2% annualized pace of growth. Ongoing price pressures in rent (up 3.4% year over year) and prescription drugs (up 3.7% year over year) more than offset lower airline fares and flat food and clothing prices during the month.
  • Excluding volatile items, core inflation also rose 0.2% in the month to 2.2% annualized, the highest level since early last year.
  • Also reported, U.S. retail sales doubled expectations with a 0.8% jump in May. The largest gain in six months was broad-based with 10 of 13 categories reporting higher spending, led by clothing, restaurants and department store sales.

Other economic news

  • The U.K. labour market remained strong with the unemployment rate holding at 4.2% in April, while average weekly earnings growth slowed to 2.8% annualized. Also reported, inflation rose 0.4% in May to a year-over-year pace of 2.4%. This marks the lowest level of inflation since March 2017, though still comfortably above the central bank’s target of 2.0%.
  • Chinese economic data largely missed expectations in May with year-to-date fixed-asset investment weakening to 6.1% growth, the weakest pace since 1996. Industrial production also slowed to 6.8% and retail sales rose 8.5% from a year earlier.

What’s to come

Canadian inflation and U.S. housing

Canadian inflation data reported on Friday highlights a busy week of economic data. In the U.S., housing starts, existing home sales and building permits will be reported. The Bank of England also meets during the week, though no policy changes are expected.

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