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Wall Street soared on hopes of Biden-Xi talk over Russia-Ukraine

calendar 21/06/2022 - 20:22 UTC

Wall Street Futures were already upbeat Monday in holiday-thinned trade on positive cues from the other side of the Atlantic (Europe) amid less hawkish Putin comments about Ukraine and Fed’s softish landing and QE-5 optimism despite bigger hikes. On Monday, the European market also got a boost after ECB President Lagarde assured some types of anti-fragmentation/bond-buying tools in the coming days along with a +0.25% rate hike in July. Thus ECB will ensure accommodative monetary policy or targeted (back door) YCC to keep spread at reasonable levels and also to prevent further fragmentation. Subsequently, the EUR slips, positive for export-heavy German and other European stocks. Also, U.S. President Biden may soon talk with his Chinese counterpart Xi and roll back almost all Trump tariffs, positive for both U.S. as-well-as Europe/Germany.

On the weekend, Cleveland Fed’s President Mester said:

·         Recession risks are increasing

·         But I want to see some slowdown in demand

·         Despite slowing growth, I do not expect a recession

·         Some inflation indicators appeared worse in May than in April

·         It will take time to get inflation back to 2%

·         It isn’t going to be immediately that we see 2% inflation. It will take a couple of years, but it will be moving down

·         We do have growth slowing to a little bit below-trend growth and we do have the unemployment rate moving up a little bit. And that is OK, we want to see some slowing in demand to get it in line with the supply

On Monday, St. Louis Fed President Bullard said:

·         The economy is slowing to the trend rate of growth as expected as a result of the Fed's policies

·         There are risks to the outlook from the Ukraine war, supply chain issues in China

·         There are always hazards, and as things stand, I expect continued expansion in the United States through 2022

·         High inflation has risen like a storm

·         US labor markets remain strong

·         US price expectations risk unmooring without the Fed action

·         US output will continue to grow through 2022

·         There is divergence in CPI, tips expected CPI needs resolving

·         Fed guidance influences the economy, and the CPI is taking hold

·         The recent rent rises could indicate inflation will stay higher for longer

·         The Fed's reaction to the pandemic wasn't bad policy, it's difficult to know what to do in the middle of a storm

·         The Fed now has some work to do to bring inflation down

·         I am hopeful that the global central bank actions will help contain inflation

·         I've been pleased with the US markets reaction to Fed policy

·         We've moved a lot on rates, but from a very low level

·         I am hopeful that the global inflation-curbing effort is to contain CPI

·         I am hopeful that the global central bank actions will help contain inflation

·         I've been pleased with the US markets reaction to Fed policy

·         We don't have as far to go on QT as it might seem

·         Current balance sheet reduction is a good place to start with

On Monday, in his presentation, Bullard mentioned The 1994 tightening cycle in which the Fed doubled interest rates to 6% in seven rapid-fire hikes that included one 75 bps and two 50 bps moves. The Fed's so-called soft landing, in which a recession was averted, was followed by a period of rapid growth and a historically tight labor market.

Bullard said he hopes Fed can also repeat the success of the 1994 tightening cycle this year without causing an outright recession: “That tightening episode caused some disruption that year--However, I have always felt that set up the U.S. economy for a stellar performance in the second half of the 1990s --- I hope we can get something like that this time-- We are moving quickly, but moving from a low level and the very accommodative monetary policy we put in place—“

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Further on Tuesday, Fed’s Barkin said:

·         We want to get back to the 2% goal as fast as we can without breaking anything

·         Inflation is high and broad-based

·         I supported a 75 bps rate hike at the June meeting

·         Today, the data still looks relatively healthy, but tomorrow is uncertain

·         We need to weigh that with signals from the real economy, that show a strong labor market

·         A lot of signals seem to be suggesting concerns about recession

·         We are going to have to restrict monetary policy, the question is how much, we'll see how much as we get into it

·         The faster inflation comes down, the less we have to do on restrictive policy. I am watching carefully how that plays out

·         That will bring down pressures on inflation

·         A lot of the pressures caused by a reaction to the pandemic, such as supply chain issues, are going to settle

·         The economy is normalizing

·         I think balance sheet reduction has a modest, additive impact

·         It is very hard to parse the impact of balance sheet reduction

·         You have to be flexible

·         I want positive forward-looking real rates across the curve

·         I agreed with Jay’ (Powell) comments at the press conference

·         I am also watching signals on the demand side

·         Between now and the July meeting, I am focused on actual inflation and expectations

·         There was a pronounced increase in inflation last month

·         After the Michigan survey, I felt it was possible to do a 75 bps hike

·         A 50-75-bps range for the July meeting seems reasonable to me

·         The Fed has to follow through to keep inflation expectations in check

·         Inflation expectations have been thrown up in the air due to events of the last two years

·         We don't have a good measure of inflation expectations

·         Part of that is because its generations since it's been this high

·         It is striking that people hate inflation

·         Consumers are just determined to spend

·         There's a lot of embedded spending desire still out there funding by excess savings

·         Higher incomes are especially supporting spending

·         Consumers are still spending in a robust way

·         Firms tell me that they're seeing some easing in wage pressures on the high and low end of the wage spectrum

·         I am hearing progress from firms on labor shortages

·         I see modest light on the horizon for supply-chain tangles

·         Supply chain issues going to be with us for a while

·         Uncertainty with the Ukraine situation and other global issues, it's hard to forecast the future for these reasons

·         Any decision on whether to sell MBS is still down the road

·         The bar is set high in terms of using the balance sheet to add to tightening

·         I wonder if we have real rates where we need them to have an impact on the US economy

·         Our difficult task is that there may be a few strong inflation readings interspersed with weak ones

·         If inflation keeps rising, there is not much reason to halt raising rates

·         You don't want to inadvertently break something and lead to a significant pullback in the reactions of economic actors that you weren't anticipating. It is a fine balance and I think judgment plays a huge part

Conclusions:

Barkin is quite right that despite Fed’s softish landing optimism, in reality, there is an urgent need for supply chain resolution not only from China (zero COVID policy) and also from Russia-Ukraine/East Europe. But as long as Russia-Ukraine geopolitical tensions and subsequent G7/US economic sanctions remain, supply chain issues and inflation will linger.

In that sense, the market may be now looking into the Biden-Xi meeting, in which apart from Trump tariff issues, Biden may also discuss Russian issues and a possible solution. As Chinese President Xi has to good influence on Putin, especially under the current geopolitical situation, where apart from China and India, almost all other big countries are isolating Russia. Also, Russia/Putin-induced global inflation and subsequent synchronized global recession will be negative for Chinese exports/economy too. Thus, ahead of Nov’22 mid-term election, Biden may seek his close friend Xi’s active help for a proper resolution of Russian aggression on Ukraine and control of inflation.

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