Aurelia Butler

US inflation dropped to 3 per cent in June, lower than expected, in the latest sign that the Federal Reserve’s interest rate rises are having an effect on price pressures.The annual increase in the consumer price index slowed from 4 per cent in May to 3 per cent, the slowest rate of inflation since March 2021.Prices increased 0.2 per cent on a monthly basis in June, up from 0.1 per cent the previous month but less than economists had forecast. The annual figure was further helped by so-called base effects, as extremely large rises from June 2022 drop out of the calculations. There was a more modest dip in the “core” CPI, which slowed to an annual rate of 4.8 per cent in June from 5.3 per cent. Core prices, which strip out volatile food and energy costs, rose 0.2 per cent month on month, compared with 0.1 per cent in May.

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The headline rate of inflation has been moving closer to the Federal Reserve’s 2 per cent target after peaking at more than 9 per cent last June. However, core inflation has proven more sticky, raising expectations that the US central bank will need to lift interest rates further.The Fed has raised its benchmark interest rate to a range of 5-5.25 per cent from close to zero at the start of 2022. Officials kept rates steady at their most recent policy meeting in June, to take stock of the effect of previous rises, but have made clear that they expect further increases before the end of the year.Labour market data released last week also suggested that the Fed’s aggressive rate rises were beginning to cool the economy, with jobs growth slowing. However, it also highlighted continued inflationary pressures, with unemployment still close to a multi-decade low and wages growing well above the levels considered consistent with the Fed’s target inflation rate.In response to the CPI data, the two-year Treasury yield, which moves with interest rate expectations, fell to its lowest level in two weeks. In the futures market, traders pulled back slightly from bets on higher interest rates in the second half of this year, though an increase from the Fed is still expected in July. US stock market futures rose, tipping the S&P 500 to open about 0.7 per cent higher.Additional reporting by Kate Duguid in New York More

ISLAMABAD (Reuters) – Pakistan’s Prime Minister Shehbaz Sharif said he was optimistic that the International Monetary Fund will approve a $3 billion bailout at its board meeting on Wednesday. Pakistan and the Fund reached a staff level agreement last month, securing much-needed funding for the cash-starved country.The agreement needs the board’s approval before disbursing $1.1 billion upfront and the rest of the money in instalments.”The meeting is happening today,” Sharif said at an event in Islamabad. “I hope the board will approve the programme. This programme will help Pakistan’s economy to stabilise.”The nine-month short-term lifeline for Pakistan’s ailing economy, which has been on the cusp of default, came after eight months of tough negotiations over fiscal discipline. The $350 billion South Asian economy faced a crippling balance of payments crisis, with its central bank’s reserves barely enough to cover a month of controlled imports.The IMF board approval will also unlock other bilateral and multilateral external financing for Pakistan.Beijing rolled over $5 billion of Pakistan’s loan in the last three months, which Sharif said he believed played a major role in averting the debt default.Saudi Arabia deposited $2 billion in support funds with the central bank on Tuesday. Fitch credit rating agency on Monday upgraded Pakistan’s sovereign rating to CCC from CCC-, and the bailout has brought relief to investors in the country’s stocks and bonds. More

German business morale has been deteriorating, suggesting that Europe’s largest economy will struggle to shake off recession.”The economy needs stimulus – rarely has this been so urgent as now,” finance minister Christian Lindner tweeted on Wednesday.The tax relief plan will be part of the draft Growth Opportunities Act, which Lindner has proposed to make Germany more competitive as a business location amid a loss of appeal due to high energy prices and burdensome bureaucracy.The draft legislation includes a total of almost 50 tax policy measures, mainly aimed at small and medium-sized enterprises, the sources said.There is also a provision to incentivise companies to invest in climate protection.This will offer companies certain tax benefits between 2024 and 2027 if they make climate friendly investments, the sources said.Lindner’s package also provides stronger tax incentives for research. It also would allow companies to offset more losses against profits from other financial years and make it possible to take write-offs for low-value assets more quickly.The Federation of German Wholesale, Foreign Trade and Services (BGA) welcomed the plans. “Tax simplifications and better depreciation options are important incentives for more investment in Germany,” said BGA President Dirk Jandura.($1 = 0.9074 euros) More

The average contract rate on a 30-year fixed-rate mortgage jumped 22 basis points to 7.07% in the week ended July 7, the Mortgage Bankers Association said Wednesday in their weekly recap of home loan applications activity. That was the highest since November and brings that rate to within 10 basis points of last October’s two-decade high in home loan borrowing costs.”Incoming economic data continue to send mixed signals about the economy, with the overall impact leaving Treasury yields higher last week as markets expect that the Federal Reserve will need to hold rates higher for longer to slow inflation. All mortgage rates in our survey followed suit,” said MBA Deputy Chief Economist Joel Kan.The rate on “jumbo” loans for amounts greater than $726,200 rose to 7.04%, the highest since MBA began tracking that data series in 2011.Rate futures markets expect the Fed to resume interest rate hikes two weeks from now after foregoing an increase last month to take the time to assess the effects of the aggressive actions it has taken since March 2022 to contain the highest inflation in four decades. The Fed has lifted rates by 5 percentage points since then from near zero, and officials have signaled that rates may rise by perhaps another half point by year end. More

LONDON (Reuters) -Britain’s economy is so far proving resilient to a surge in interest rates over the past year and a half, but it will take time for the full impact to feed through, the Bank of England said on Wednesday.The Bank last month raised rates to 5%, up from 0.1% at the end of 2021, raising concerns about a hit to households, businesses and the broader financial sector that could push the economy into a recession.But in a half-yearly assessment of the health of the financial system, the BoE said there was no reason for alarm.”The UK economy and financial system has so far been resilient to interest rate risk,” BoE Governor Andrew Bailey told a press conference.”We will continue to monitor credit conditions for any signs of tightening which are not explained satisfactorily by changes in the macroeconomic outlook.”The proportion of households with heavy mortgage burdens was rising. But even considering the higher cost of living – with inflation at 8.7% in May – it was likely to remain below the peak seen in 2007.On Tuesday, average interest rates for new two-year fixed-rate mortgages – the most common form of housing finance – rose above their peak following last September’s mini-budget to a 15-year high, according to data provider Moneyfacts.Britain’s finance industry estimates 800,000 households will need to refinance onto more expensive mortgages in the second half of 2023, and a further 1.6 million in 2024.The Bank said the typical mortgage holder refinancing later this year would pay an extra 220 pounds ($285) a month, and that, by the end of 2026, nearly 1 million households would be paying at least 500 pounds a month more.The number of households spending more than 70% of their income on mortgage payments, after tax and other essential spending, is on course to rise to 650,000 by the end of the year, 2.3% of the total and lower than the 3.4% peak in 2007.Consumer credit is a bigger source of trouble, with around 10% of households spending more than 80% of income after taxes, essentials and housing costs on servicing debt, up from 9% a year ago.UK BANKS ‘ROBUST’The BoE said British banks were less exposed than households to the adverse effects of higher interest rates, especially compared with financial institutions in other countries, while the corporate sector remained “broadly resilient”.”Nevertheless, higher financing costs are likely to put pressure on some smaller or highly leveraged firms,” it added.The BoE saw particular risks in global commercial real estate and from corporate borrowing in the private credit and leveraged lending markets.Britain’s eight largest lenders all have enough capital to cope with higher interest rates, and no financial need to keep down rates for savers or treat borrowers harshly, the BoE said following its annual ‘stress test’ of the sector.”Major UK banks’ capital and liquidity positions remain robust and profitability has increased, which enables them both to improve their capital positions and to support their customers.”Bank shares rallied on the prospect of bigger payouts to shareholders.However, recent data has shown the biggest year-on-year fall in house prices since 2011 and mortgage lending has fallen sharply over the past year.”Many (lenders) are cutting margins in an attempt to maintain business levels, and they may have to revisit their criteria if they hope to maintain a healthy level of lending,” said Simon Gammon, managing partner at mortgage broker Knight Frank Finance.The BoE’s Financial Policy Committee left banks’ counter-cyclical capital buffer, a tool used to manage risk and lending over the credit cycle, unchanged at 2%. The Bank added that, following the collapse of Silicon Valley Bank, it was working with the finance ministry to ensure that there were options to smoothly wind up small banks that were exempt from some requirements applying to larger ones.($1 = 0.7726 pounds) More

BENGALURU (Reuters) – U.S. Treasury yields will broadly fall over the coming year on expectations the Federal Reserve will soon end its hiking cycle, according to fixed-income strategists polled by Reuters, who also predicted a steeper yield curve in the year ahead.Since its March 24 low, the yield on the U.S. 2-year Treasury note surged over 150 basis points, reaching a sixteen-year high of 5.12% last week as a tight labour market and still-sticky inflation suggested further rate hikes are needed.But the yield has since fallen around 25 bps as the U.S. economy created the fewest jobs in about two-and-a-half years and markets interpreted recent statements from Fed officials as indicating the hiking cycle was nearing its end.This recent decline in yields will continue over the coming year, according to the July 5-12 Reuters poll of 75 bond strategists.”Economic data right now reflects decent momentum. That is going to dissipate in the next couple of months,” said Thomas Simons, senior money markets economist at Jefferies, who expects yields to broadly fall in coming months.”The market will price in a pretty aggressive path of rate cuts coming up.”Yields on the interest-rate-sensitive U.S. two-year note will drop about 70 basis points by end-year to 4.15%, the poll showed.The benchmark U.S. 10-year note yield, currently at 3.95%, will fall to 3.50% in six months as was predicted in last month’s poll.If realized, this would narrow the spread between the two-year and ten-year Treasury yields to 65 bps by end-2023, down from around 90 bps currently.”The curve is likely to remain deeply inverted as the Fed threatens more hikes later this year. We expect gradual steepening in Q4 and more dramatic steepening in Q1 2024 when we expect the first cut,” noted Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.”Slowing inflation and labour market data should help steepen the curve.”In a continued divergence from the Fed’s view, market expectations based on interest rate futures see only one more rate hike this year, versus two predicted by the Fed. The first rate cut is currently priced in for March 2024.This has led to a decline in yields and a rise in bond market volatility.The MOVE index, the most widely-followed volatility indicator, hit a five-week high last week and is currently about 50% above its long-term average.Meanwhile, the Fed’s inflation projections are considered to be too hawkish by many who expect a steeper decline in price pressures and lower bond yields.”Even if one assumes slower progress on inflation, six-month rolling inflation (180-day moving average) will still break out of its range in the next two months – heralding the end of ‘sticky inflation’ that has consumed markets in the last two years,” noted Guneet Dhingra and Allen Liu, bond strategists at Morgan Stanley (NYSE:MS). More