Global Banks Ponder Cuts

MONETARY

• On a panel of central bankers at a conference in Portugal, Federal Reserve Chairman Jerome Powell reiterated to markets that he has generally please with progress made on reducing inflation, but that additional confidence is needed¹
  • (Powell) ““We want to be more confident that inflation is moving sustainably down,”¹
  • (Powell) “We want to understand that the levels that we’re seeing are a true reading on what is actually happening with underlying inflation.”¹
• Higher than expected inflation readings in the first half of 2024 drastically reduced both the Fed’s and Market’s expectations for future easing of Monetary Policy. However, Powell did go on to note that Federal Reserve staff are very attentive to the concept that keeping rates to high for long also poses some risks¹
  • (Powell) “It’s very much understood by us that we have two-sided risks,”¹
  • Important to note that the pace at which the Federal Reserve raised rates was the quickest in the past 40yrs during the 2022-2023 Rate Hike Cycle
    • Since then, the Fed has kept its Federal Funds Target Rate steady at a level of 5.25-5.50% for the past year¹
• Powell went on to note in the discussion that a drastic cooling in the labor market would be one of the factors that could make the Fed consider cutting rates more rapidly than what is currently expected¹
  • (Powell) “You can see the labor market is cooling off, appropriately so, and we’re watching it very carefully”¹
• Various Non-U.S. central banks have been also considering reducing their policy rates, while also projecting for disinflation trends to continue⁴
  • Governing council member Fabio Panetta (ECB) went on to say “The reduction of official rates can proceed gradually, accompanying the return of inflation towards the objective, if macroeconomic trends remain in line with the ECB’s expectations,”⁴
    • The European Central Bank cuts rates for the first time in the current Rate Cut Cycle in June⁴
  • Governor Rhee Chang-yong (Bank of Korea) stated that disinflation was expected to continue after recent positive signs, while noting a pick-up in household debt growth and heightened volatility in foreign exchange markets⁴
    • The Bank of Korea is expected to keep its policy rate on hold at a 15-year high of 3.50% through the third quarter of 2024, at which point in time a 25-basis-point cut could come in the final quarter, roughly around the same time as a likely start of policy easing by the U.S. Federal Reserve⁴
• U.S. Federal Reserve considering adjusting excess capital requirements for the largest U.S. globally systematic important banks (GSIBs) to adjust for economic growth facotrs⁶
  • Currently, the largest banks in the U.S. are required to keep excess capital above a certain limit derived from a formula which was adjusted by the Federal Reserve in 2015, but first implemented following the Global Financial Crisis⁶
  • The Federal Reserve is considering adjusting that formula to account for general economic growth more accurately, which would have the effect of reducing the amount of excess capital the largest U.S. banks would need to keep on hand⁶
    • Functionally, this would allow for these banks to loan out more of their funds and theoretically stimulate the economy via more lending⁶

GEOPOLITICS

• In an effort to keep energy prices high, OPEC member countries have continued to reduce both target production, as well as actual production levels during the entirety of 2024²
  • OPEC actual production has dropped consecutively every month in 2024, falling from a level of 34.72M(bpd) to 33.9M(bpd)²
    • OPEC target production has also fallen over this time as well²
  • Production cuts have largely been successful at keeping energy prices high, with no mitigating effects coming from U.S. energy policy moves²
  • S. oil production has been relatively steady, with some volatility, over the past year – which has also contributed to higher prices²
• Biden Administration in the early stages of developing plans to persuade foreign nations to invest heavily in U.S. chipmaking capabilities³
  • Effort comes in response to combat current market dynamics which are largely dominated by Chinese companies, not only in chip manufacturing, but in green energy development as well³
  • Japan, South Korea, and Taiwan have been active in U.S. chip manufacturing efforts so far³
    • SK Hynix, a South Korean chipmaker, is building a $3.8 billion factory in Indiana which is likely to generate roughly 1,000 new jobs in the region³
  • According to Boston Consulting Group & the Semiconductor Industry Association, the United States’ share of the global chip manufacturing industry is projected to rise to 14% from 10% by 2032³
  • The CHIPS Act provides for $500M annually for supply chain research and development efforts which are designed to find countries to strategically partner with for chip manufacturing³
    • Current countries that are involved in that program include Costa Rica, Indonesia, Mexico, Panama, the Philippines and Vietnam³
    • A major issue with partnering with these countries revolves around training local workforces to acquire the skills needed to run chip manufacturing facilities³

[See Below for Disclosures & Annotations]

 

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. The Wall Street Journal. “Powell Talks Up Progress, Putting Rate Cuts Back Into View”. July 2, 2024
2. Oil & Gas Journal. “OPEC+ production closer to target than any time in 2024”. July 8, 2024
3. Economic Times. “US creates high-tech global supply chains to blunt risks tied to China”. July 8, 2024
4. Reuters. “ECB can continue to gradually lower rates, Panetta says”. July 8, 2024
5. Reuters. “Bank of Korea will consider trade-offs for monetary policy, governor says”. July 8, 2024
6. Reuters. “Fed may tweak rule that could save biggest US banks billions”. July 9, 2024.