The Day at a Glance | Jul 14 2022

The Top

*The likelihood of the FED hiking the interest rate in 100 base points in July increases.

*The European Commission cut its growth estimates for Europe to 1.4% (vs 2.3%e.); it forecasts an average 7.6% rate of inflation this year.

*Inflation for producers increased more than expected in the United States during June (11.3% annual vs 10.7%e.).

*Volatility in Italian markets in light of risks of the coalition´s dissolution. 

*Mexico´s government halts European wind and solar energy plants to aid state companies; delays permits.

*A growing number of home-owners in China refuse to pay mortgages; fears increase of the real-estate sector´s crisis spreading.

*The Central Bank of Canada surprised markets with a 100bp interest rate increase.

*Economic indicators: China´s 2Q22 GDP will be made known (1%e. annual).

Economic environment

Higher rates expected in the United States. After yesterday´s inflationary surprise in the United States, markets have adjusted estimates of interest rate increases on behalf of the FED. Markets are now considering a 100 base point increase with a higher degree of probability (80%) in the FED´s next meeting, scheduled to take place on July 27th (according to the CME) – followed by a 75bp increase in September, and a 25bp increase in November and December. This entails that the interest rate could reach 3.75%-4% by the end of the year (vs 3%-3.25% last week). These expectations have triggered volatility in recent weeks, in light of a highly uncertain scenario regarding inflation and risks of a recession. Markets have even started to take into account interest rate cuts for March of 2023, a sign that the FED could adjust its monetary policy too soon in order to fight inflation and push the economy into a recession. Raphael Bostic, of the Atlanta FED, assured yesterday that “everything is in play”, making reference to the fact that they are considering an aggressive increase in July´s meeting in order to ensure the stabilization of prices. Loretta Mester, of the Cleveland FED, assured that there are no reasons to increase the rate in less than 75bp in July, although she didn´t assure that a greater increase will be carried out, considering that various economic data is still unknown before the central bank´s next meeting. Mester acknowledged that inflation is unacceptably high and that the FED must continue to carry out increases until inflation comes down. Lastly, Mary Daly, of the San Francisco FED, sees a 75bp increase as the base scenario after the recent unfavorable inflationary data. Several market players consider it unlikely that the FED will carry out a 100bp increase without previously sending a clear message to markets; while some banks, like Nomura, have already set a 100bp increase in July as their base scenario. Uncertainty prevails among investors.

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