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Asia shares mixed after Fed assurance on rates lifts Wall Street

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By YURI KAGEYAMA

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The economy is still largely holding up amid a red-hot job market, but it has shown some signs of distress recently. Sales at U.S. retailers unexpectedly slumped in May from April.

The gift of understatement.

The reality that was yesterday showed retail sales in the U.S. fell 0.3% MoM in May of 2022, against expeectations towards a .2% rise, the first decline this CY. It didn't end there, though. The rise first reported in April was revised downwarded to .7%. Sectors that are sensitive to higher borrowing costs were hit harderst: Auto sales, electronics & appliance stores, furniture stores, etc.

Thursday will see U.S. housing data posted. Building permits and housing starts are forcast to decline. Along side housing will be initial unemployment claims, which are expected to rise to skirt the top of the 200K-250K range (viewed widely as consistent with a healthy labor market). Concernful increase for a second week inside what was hoped to be a robust summer travel and recreation season. This could also throw a wrench in the Fed's projections for unemployment to rise a modest 3.7% at the end of this year, 3.9% next year, and 4.1% the year following that.

Impact on markets will be unclear, although investors had overnight to chew on the words of the Fed Chair, himself, when he admitted that Fed officials had been expecting progress, and they did not get it. “In many ways, we got the opposite.” Combined with release of the Fed’s GDP tracker - tracking down to zero- the Fed revised its predictions of growth to a far more realistic 1.7% forecast, and trimmed down next year's projection by half a percent. The Fed said that a zero print with a couple of weeks left in the quarter creates the risk of a second consecutive quarter of negative growth.

Gone, now, is all talk about peak inflation, as the last Trimmed Mean inflation rate (a measure of inflation without outliers in either direction) rose by a disturbingly high 6.5% YoY, showing expanding inflation instead of focal inflation, and short term turning into long term.

All eyes also on the U.K. today, after the Bank of England raised its key rate by 25bps to 1.25% (as expected), pushing borrowing costs to thirteen year highs. Inflation in the UK is running at forty year highs, and is expected to hit double digits in Q3, with fresh estimates around 11% for October. Recession remains a concern, as the economy contracted 0.3% in April and 0.1% in March.

Switzerland also surprised analysts when the Swiss National Bank hiked its rate by 50bps, the first rate hike by the central bank since 2007. Yield on the Swiss ten year government bond rose to 1.5%, the highest in since July of 2011, SNB revised year-end inflation expectations higher to 2.8% compared to previous projections of 2.1%.

Have a good day.

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