The Day at a Glance | May 18 2022

The Top

*Powell committed to carrying out interest rate increases until there is “clear and convincing” evidence of a decrease in inflation.

*Banxico won`t necessarily replicate the FED`s monetary actions: Gerardo Esquivel.

*Inflation in Europe became more moderate at 7.4% annual in April.

*Finland and Sweden officially sent requests to join NATO; Turkey opposes their approval.

*Inflation in the UK reached its highest level in 40 years (9% annual).

*Minimum 15% corporate tax frozen in US Congress; unlikely to advance in 2022.

*ECB needs to eliminate negative interest rates as soon as possible: Olli Rehn, member of the ECB.

*Net interest payments on public debt reached a record high in the United States during April – in light of increasing interest rates.

Economic environment

FED against inflation. In a public Wall Street Journal event yesterday, Chair of the FED Jerome Powell assured that they will not stop increasing interest rates until there is “clear and convincing” evidence that inflation is decreasing. If this involves taking on a more restrictive monetary stance, we`ll do it, affirmed Powell. His comments reinforce the FED`s aggressive rhetoric with respect to inflation as the central bank seeks to maintain credibility amidst the highest increase in prices in the country since 1981. Powell said that the stability in prices is the cornerstone of the economy as well as the Federal Reserve`s priority; he reiterated that the process to maintain stability in prices could be painful, and that they would be willing to cause a slowdown and an increase the unemployment rate in order to reach their goal. Powell assured that the evolution in short term prices could determine how aggressive interest rate increases will need to be. If there is no clear decrease in inflation, the FED will have to do more, he said. The FED`s aggressive stance and rhetoric has already caused important adjustments in equity markets in 2022 (S&P500 -15% since its peak reached in January) as the increase in the risk free rate decreases many company`s valuations. Additionally, the increase in rates (US10y 2.99%) has led to an increase in costs of indebtedness for house purchases as the FED takes on a less accommodative stance and inflation becomes more persistent. This could cool down one of the economy`s most important markets – the real-estate sector. Powell affirmed that he is not worried about the reaction among financial markets and that these seem to be receiving the message sent by the FED; markets have not stopped adjusting in an orderly manner, and the idea is to cause financial conditions to adjust to the point that growth becomes moderate.

Banxico will not necessarily follow the FED. In an interview with Bloomberg at the start of the week, Deputy Governor of the Central Bank of Mexico, Gerardo Esquivel, assured that Banxico will not necessarily replicate every monetary decision made by the FED. Esquivel said that it`s likely that they will work with the FED in tandem for some time, but could eventually diverge as Banxico started its increasing rates cycle way before and Mexico doesn`t have such a strong labor force – nor is it logging excess demand like the US. Esquivel pointed out that the bank`s most recent message, in which it committed itself to consider carrying out more aggressive interest rate increases, it`s main goal is to leave inflationary expectations anchored; but this doesn’t necessarily imply more aggressive actions in the future.