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Fed Chair Powell is putting his middle office time on pause to try a front office role. Elon Musk is living rent-free in Goldman Sachs’ coffers as he refuses to pay Twitter’s SF rent. Investment banks are bailing on China IPOs.

Let’s dive in.

Economy Heat Check

As of 6/14/2023 market close, unless otherwise stated.

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Expectations Reset

Powell Pauses Interest Rate Hikes

Fed Chair Powell has paused his hiking from the middle office to try his hand at a front office role. The highlight of his press conference audition yesterday was his artistic choice to say “skip” instead of “pause.” That signaled the Fed fully intends to continue raising interest rates at its next meeting.

The Fed decided to keep interest rates steady in June after 10 consecutive increases. The decision is a continuation of the Fed's strategy to gradually raise rates, with Powell emphasizing the need for a slower approach. But, be prepared for the Fed to raise rates next month if the economy and inflation do not cool down further.

Markets had a mixed response to Powell’s press conference audition. The decision was largely viewed as dovish, so the S&P 500 and Nasdaq gained modestly while the Dow declined.

Most officials still project two more rate increases this year. Peak rates currently range from 5.5% to 5.75%. Rumor has it Powell persuaded both hawkish and dovish officials this month by strongly suggesting a rate hike in July.

The End to Egglation  

Cooling inflation had the Fed bench warming this month. Tuesday’s CPI was the Fed’s star witness for the case to pause a rate hike this month. But, US consumer prices are still far too hot for the Fed to stay sidelined for long.

In May, consumer prices rose 0.1% from April. That resulted in a 4% increase from a year earlier – the smallest 12-month increase in over two years. Excluding food and energy items, core prices rose 0.4% from April – up 5.3% from a year earlier.

The Fed still aims to bring inflation down to 2%, but current readings remain higher than desired. A major culprit for the discomfort is rising shelter costs, which account for about a third of consumer spending. But, it has also yet to reflect a deceleration in inflation for newly signed rents. Keep an eye on used-car inflation and commodity prices, which are expected to cool down as well.

Still to Come: BOJ to Bail

The BOJ is the third and final central bank to release its rate decision this week. The BOJ is unlikely to change policy, but yen traders will be quick to remind you that’s exactly what it wants you to think. Before they come out with a surprise. So always be on your guard when the BOJ is concerned.

In all likelihood, there will be no change to monetary policy from the BOJ at this meeting. Or any time soon. But, that’s not to say to ignore the possibility of some action. The BOJ has been reluctant recently to provide accurate forward guidance – not to mention its history of surprising markets every now and then. Meanwhile, the US Fed hasn’t gone against the grain since 2009.

Interest rates currently remain at -0.1% as they have since 2016. Commentary has remained ultra-dovish from BOJ members, even if inflation has ticked higher. If they are to change anything, it would likely be a wider yield curve control band. Another move could be to abolish the policy altogether. And that could spur very strong yen strength – and USD/JPY weakness.

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_{“Net Return" refers to the annualized internal rate of return net of all fees and costs, calculated from the offering closing date to the date the sale is consummated. IRR may not be indicative of Masterworks paintings not yet sold and past performance is not indicative of future results. See important Regulation A disclosures at masterworks.com/cd.}