Federal reserve officials emphasize necessity of higher rates

China's property support measures drive Asian stock rally; US Dollar weakens as rate hike expectations persist

By Ahmed Azzam | @3zzamous | 11 July 2023

  • Federal reserve officials emphasize need for rate hikes

  • Vice Chair Barr: progress made, more work ahead

  • President Daly calls for further rate increases

  • Cleveland Fed Chief Mester supports rate hike forecast

  • British pound reaches highest level since April 2022, crossing above $1.29 mark

Chinese stocks rally on increased support for property sector

Chinese stocks surged across Asia as China intensified its efforts to bolster its ailing property sector and hinted at potential additional economic assistance.

Asian equities experienced a robust increase of over 1%, with Hong Kong, South Korea, and Taiwan leading the gains. Reports published in China's state-run financial newspapers on Tuesday indicated the imminent implementation of further measures to support the property market, alongside initiatives aimed at enhancing business confidence.

On Tuesday, the dollar index retreated to approximately 101.8, reaching its lowest levels in two months. This decline came as several officials from the US central bank hinted at a probable continuation of interest rate hikes to combat inflation. Nonetheless, the conclusion of the current monetary tightening cycle appears to be within reach. Presently, markets have priced in a 25 basis point interest rate hike for this month, while doubts persist regarding the necessity of further increases. Moreover, US consumer inflation expectations for the upcoming year decreased for the third consecutive month, falling to 3.8% in June 2023 from 4.1% in May, marking the lowest level in over two years. Investors are now eagerly anticipating US consumer inflation data on Wednesday and producer inflation figures on Thursday, seeking further insights into the state of the economy and the trajectory of interest rates.

Federal reserve officials emphasize need for rate hikes

Three Federal Reserve officials expressed the belief that policymakers will need to implement additional interest rate hikes later this year to restore inflation to the central bank's desired target. During a Bipartisan Policy Center meeting, Michael Barr, the Federal Reserve Vice Chair for Supervision, emphasized the significant progress made in monetary policy over the past year. However, Barr acknowledged that there remains some unfinished work. Mary Daly, the President of the Federal Reserve Bank of San Francisco, stated at the Brookings Institution in Washington that it is probable that a couple more rate hikes will be necessary throughout the year to effectively steer inflation back to a sustainable 2% path. Similarly, Loretta Mester, the President of the Federal Reserve Bank of Cleveland, speaking at a University of California, San Diego event, concurred with the median forecast of her fellow Fed officials, which suggests two additional rate increases.

British Pound surges as robust wage growth puts pressure on Bank of England

The British pound continued its upward trajectory, surpassing the $1.29 milestone and reaching its highest level since April 2022. This surge was fueled by the release of pay growth data that exceeded expectations, intensifying the pressure on the Bank of England to persist with its interest rate hikes. Notably, British wages, excluding bonuses, witnessed a remarkable 7.3% surge in the three-month period ending in May compared to the previous year. This substantial increase, the largest outside the confines of the COVID-19 pandemic, outperformed the projected 7.1% growth. Furthermore, total pay growth, excluding the pandemic period, achieved a historic peak of 6.9%.

However, amidst the positive wage growth, the unemployment rate unexpectedly rose to 4%, signaling a slight setback. Moreover, employment gains fell short of forecasts, presenting a potential challenge for the Bank of England. Nevertheless, Bank of England Governor Andrew Bailey remained steadfast in his commitment to tackle inflation. He emphasized the need for policymakers to persist in their efforts, asserting the importance of "seeing the job through." This statement underscores the central bank's unwavering determination to pursue an aggressive policy tightening campaign.