What’s happening: Investors see a growing probability that the Federal Reserve can raise interest rates by a full percentage point at its next meeting for the first time in the modern era. In June, the Fed raised interest rates by three-quarters of a percentage point, something the Fed hasn’t done since 1994.
Previously, Fed officials had expressed concern about the consequences of such a strong rally.
Break it: In the short term, the inflation picture is undeniably unpleasant, putting pressure on central banks to quickly bring the situation under control.
Much of June’s increase was due to a nearly 60 percent increase in gasoline prices year-on-year. But inflation concerns have extended beyond energy. The haven index is up 5.6% year over year (more on that below). Prices for home furniture increased by 9.5% during the same period, while airfares increased by more than 34%.
For a guide to what comes next, look to America’s northern neighbor. The Bank of Canada raised its key interest rate by one percentage point on Wednesday, noting that inflation in the country is “higher and more persistent” than the central bank thought in early spring. .
Other policymakers are also taking action. South Korea and New Zealand raised interest rates yesterday, while Singapore’s monetary regulator and the Philippines’ central bank made an emergency decision to tighten policy early on Thursday.
“Clearly, with other central banks acknowledging the need for a boost, the Fed is no longer alone,” James Knightley, ING’s chief international economist, told me. That gives it “more cover to go stronger.”
Knightley still predicts a three-quarter percentage point increase by the end of this month, amid concerns among many Fed officials about pushing the United States into a recession. But a full point gain is “certainly across the board” given the recent flurry of inflation data, he noted.
Housing costs are making inflation much worse
The haven component of CPI continued to rise strongly in June, recording its biggest annual gain since February 1991.
That concerns economists because rising housing costs are a problem. Food and gas prices can change quickly. But people are locked in for 12 to 24 months of rent when they sign a lease.
Housing represents about a third of the value of the basket of goods and services that the US Bureau of Labor Statistics uses to track consumer prices, making its trajectory especially important.
Remember: The Federal Reserve Bank of San Francisco wrote in February that rents and home prices could push the Consumer Price Index up “within the next 24 months.”
That complicates “peak inflation” hopes, even as oil prices fall and consumers place confidence in the Fed’s ability to do its job effectively.
Cryptocurrency bankruptcies continue to happen
When I spoke to advocates of digital currencies recently, many put a positive spin on the deep “crypto winter” that is underway.
Their advertisement: As prices plunge and chaos spreads across the crypto market, weaker or less obvious projects will fail. Only solid businesses make it to the next chapter, establishing a stronger foundation.
However, even if you subscribe to that logic, the interim promises to be messy.
Celsius became the latest in the industry to file for bankruptcy on Wednesday. The crypto lender, which has 1.7 million users, froze withdrawals and transfers last month, citing “extreme market conditions”.
Another crypto lender, Voyager Digital, filed for bankruptcy last week. It said the “sustained volatility and contagion in the crypto market over the past few months” as well as customer defaults, require “determined and decisive action”.
Investor Insights: There are likely to be more casualties in the coming months. Bitcoin is weakening below $20,000 as fear continues to dominate investor sentiment, forcing risk-takers to take the price much higher. The digital currency is down more than 70% from its November peak. Ether is about 78% below its all-time high.
Conagra, Ericsson, JPMorgan Chase and Morgan Stanley report results before US markets open. American outdoor brands followed after the close.
Also today: The US Producer Price Index, another key measure of inflation, arrives at 8:30 a.m. ET.
Coming tomorrow: Earnings from BlackRock, Citigroup, BNY Mellon and Wells Fargo.