Weekly house view | Regime change at the Fed
The week in review
At his first monetary policy meeting as Federal Reserve Chair, Kevin Warsh slashed the post-meeting statement from 341 words to 130 words, marking a regime change in communications at the Fed. Warsh adopted a hawkish posture and the US Treasury yield curve experienced a “bear flattening” – short-term yields rose while long-term yields were little changed. Warsh wants less Fed communication, a smaller and less complex balance sheet and broader measures of data. He declined to produce a forecast for the socalled “dot plot” of projections, which showed nine officials – half of those who submitted dots – expecting at least one interest rate hike this year. The S&P 500 fell on the day of Warsh’s first policy meeting. The blue-chip index has never had an up day on the inaugural meeting day of a new Fed Chair. For the week, the S&P 5001 rose 1%.
The US-Iran memorandum of understanding appeared shaky to start with, but Iran’s foreign minister later said there had been “major progress” after talks aimed at reaching a permanent settlement to end their war.
In the UK, Keir Starmer said he was stepping down as prime minister after rival Andy Burnham won a byelection, putting him in pole position to take over. In the corporate world, BMW cut the operating profit forecast for its car business, mainly as a result of its struggles in China. German Chancellor Friedrich Merz said the Chinese currency was undervalued by 30% and pushed for international dialogue on currency valuations.
The Bank of Japan raised rates to 1% and the yen weakened as markets believe the central bank is behind the curve.
Quote of the week
Merz handed US President Donald Trump a German national team football jersey at the Group of Seven summit, adding: "We're on the same team." Days later, Italian Prime Minister Giorgia Meloni, who was also at the G7, accused Trump of being too “accommodating” to the enemies of the west.
Key data
US retail sales rose 0.9% month-on-month in May. The control group, which excludes volatile categories, grew 0.7% versus 0.4 expected. China’s retail sales fell in May for the first time in over three years. German investor morale rose in June on hopes of easing Iran tensions.
