PrefBlog

The FOMC stood pat today:

The Federal Open Market Committee approved the following statement for release by a 12 – 0 vote:

The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve’s dual mandate. The Committee reaffirmed its policy of maintaining ample reserves in the banking system.

Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.

Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.

“The committee will deliver price stability”? That sounds more like a Republican talking point than a central bank pronouncement … well, we’ll see. And there’s a lot less economic substance in this release than I like to see. Nevertheless, it carried unanimously, as was so eagerly trumpetted in the first line, which surprises me. Maybe Trump-toadyism has taken over. Maybe everybody just wants to be nice to Warsh at his first meeting. I certainly don’t know.

But the opacity continued into the press conference:

But as determined as Warsh said the Fed was to modernizing and fixing the economy’s problems, Warsh was noticeably less willing to provide detailed answers about the Fed’s decision-making process or thoughts on broader economic topics than Powell. Warsh often referred back to the Fed’s brief statement about the economy rather than expounding upon it.

In an answer that Warsh acknowledged was purposefully “curt,” he said: “I’ve got nothing more to say than the statement itself.” In another, he noted, “I can’t do much better than the committee just did. So let me restate it.”

The Fed’s economic projections still include the dot-plot:

Ben Werschkul comments:

The Federal Reserve’s latest “dot plot,” outlining policymakers’ interest rate projections, revealed a sharp shift in central bankers’ expectations.

Not only are rate cuts almost surely off the table for the rest of the year, but there is also a sharply higher chance of a hike before the end of 2026.

Nine policymakers who participated in the exercise projected at least one hike, with six even suggesting multiple hikes could be in the offing.
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The median forecast for interest rates at the end of 2027 remains unchanged at the current rate of 3.50% to 3.75%.

The projection is a sharp change from the outlook released in March, which had maintained a median forecast for one rate cut in 2026 and two in total by the end of 2027.

The equity markets responded poorly:

Major North American stock indexes immediately turned lower after the U.S. Federal Reserve kept interest rates unchanged as investors interpreted the accompanying details as being hawkish.

Short-term bonds yields spiked, as did the U.S. dollar against major currencies. The Canadian dollar traded at its lowest since 2025, at just above the 71 cents US level, down about a third of a cent for the session.

The U.S. two-year bond yield rocketed 9 basis points higher, a large one-day move. Short-term ​U.S. interest-rate ‌futures are now pricing in a ⁠bigger ​chance that the Federal Reserve will deliver ​a ‌rate hike by September than opt to ‌keep ​rates where they ‌are.

The ​shift in market-based ⁠rate-path expectations ⁠comes after the ​Fed said it would leave the policy rate in its ⁠current 3.50%-3.75% range at this time, but a ⁠near-majority of policymakers ​penciled a ⁠rate hike by the ‌end of 2026 ​to combat higher inflation.

The SSL situation has been resolved, I think. If anybody’s still getting a ‘certificate problem’ or other peculiar behaviour, please let me know at jiHymas@himivest.com.

Sorry about the expired SSL certificate. I have a guy working on it – the problem should be fixed very soon.

US wholesale inflation ticked up:

The Producer Price Index, a closely watched gauge of wholesale inflation, rose 1.1% in May, lifting the annual rate to 6.5%, its highest since November 2022, according to Bureau of Labor Statistics data released Thursday.
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Excluding food and energy prices, a core measurement of PPI rose 0.4% from April, holding at 4.9% annually.

When also stripping out the price changes for “trade services” – a volatile category that measures profit margins for wholesalers and retailers – in addition to energy and food, that index rose 0.8% in May (a four-year high) and 5.1% annually, the largest rise since October 2022.

And the European Central Bank hiked its policy rate:

The European Central Bank on Thursday became the first major central bank to raise interest rates in response to the Iran war as policy makers around the world, including new U.S. Federal Reserve Chair Kevin Warsh, wrestle with how to confront the inflation fed by sharply higher oil prices.

The ECB’s rate-setting council raised its benchmark rate to 2.25 per cent from 2 per cent, where it had been for a year. The move comes ahead of rate-setting meetings next week at the Fed, the Bank of Japan and the Bank of England.
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The bank’s future decisions depend to a great extent on how long energy prices remain elevated and how high they go, ECB President Christine Lagarde said at a post-decision news conference. She said the bank was “well positioned to navigate the uncertainty caused by the war” and would “closely monitor the situation and follow a data-dependent and meeting-by-meeting approach.” She said the bank was “not pre-committing to a particular rate path.”

She said oil prices were expected to “lift inflation further over the summer” and that inflation was expected to remain “well above target” into the first half of next year. The Strait of Hormuz has been closed to most ship traffic for 103 days now.

Central banks in Australia and the Philippines have raises rates since the start of the war, and attention is focusing now on decisions in larger economies. For its part, the U.S. Federal Reserve is expected to keep its key interest rate unchanged when it meets next week with new chair Warsh, appointed earlier this year by President Donald Trump.

The Bank of Canada kept things steady today:

The Bank of Canada today held its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%.

The conflict in the Middle East is now in its fourth month. The resulting increases in energy prices and disruptions in global supply chains are weighing on global economic growth and pushing up inflation. At the same time, the US administration continues to propose new tariffs and trade policy uncertainty remains elevated.

In the United States, economic growth remains solid, supported by consumption and AI‑related investment. In the euro area, growth is subdued, with higher energy prices weighing on activity. China’s economic growth continues to be supported by strong exports.

Canadian financial conditions have loosened since the April Monetary Policy Report. Global equity markets have been buoyant and bond yields remain volatile. The Canadian dollar has weakened against the US dollar and other currencies.

In Canada, GDP edged down by 0.1% in the first quarter, weaker than expected at the time of the April MPR. Consumer spending grew 1.4% but government spending unexpectedly declined. Housing activity also declined and business investment remained weak. Exports fell while imports rose strongly as inventories were rebuilt. Employment was up in May, but looking through monthly volatility, employment in Canada is little changed since the start of the year. The unemployment rate continues to fluctuate in the 6 ½%-7% range with the most recent reading at 6.6% in May.

Recent data suggests that growth will resume in the second quarter but, even with some rebound, the economy is expected to remain in excess supply.

As expected, CPI inflation rose in April, reaching 2.8%. The increase reflects energy prices, both higher oil prices and the impact of the elimination of the consumer carbon tax falling out of the 12-month rate of inflation. So far, there has been limited evidence of broad-based pass-through of higher energy prices to other consumer prices. Measures of core inflation have moved down to around 2% and the share of CPI components growing above 3% is close to its historical average. Food price inflation moderated but remains high, and shelter inflation continued to slow. With global oil prices still elevated—roughly $10 a barrel above our April MPR assumptions—total inflation is expected to hover around 3% in the near term before easing gradually towards 2%.

Against this overall backdrop, Governing Council decided to maintain the policy rate at 2.25%. Economic activity in Canada has been weak and uncertainty about US trade policy persists. The conflict in the Middle East is ongoing and oil prices remain elevated. Governing Council is continuing to look through the war’s near-term impact on headline inflation, but will not let higher energy prices become persistent inflation. As the outlook evolves, we stand ready to respond as needed. The Bank is committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.

Inflation in the US ticked up:

Annual inflation rose to a three-year-high of 4.2% in May, underscoring how elevated energy prices are rippling through the US economy, according to new data from the Bureau of Labor Statistics.

Prices rose 0.5% on a monthly basis, driven higher by the US-Israeli war with Iran, the latest Consumer Price Index shows. The higher cost of energy accounted for 60% of the monthly increase.

Overall food prices and grocery prices didn’t rise as fast as they did in April, increasing 0.2% and 0.1%, respectively, versus 0.5% and 0.7%.
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The underlying inflation trends are running more muted. The closely watched “core” CPI gauge that strips out food and energy rose a slower-than-expected 0.2% from April, bringing the annual rate to 2.9%.

PerpetualDiscounts now yield 5.65%, equivalent to 7.34% interest at the standard conversion factor of 1.3x. Long corporates yielded 4.97% on 2026-06-9, but the closing price did not change from the 9th to the 10th, so we’ll overlook the date mismatch. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed sharply to 235bp from the 250bp reported June 3.