Dow dropped 209, decliner over advancers about 2-1 & NAZ gave back 138. The MLP index fell 1 to the 223s & the REIT index declined 3+ to the 357s. Junk bond funds fluctuated & Treasuries were purchased, reducing yields (more below). Oil was off about 1 to the 68s & gold rebounded 12 to 1936.
AMJ (Alerian MLP Index tracking fund)
Business activity growth in Europe slowed in Jun, pointing to a difficult end to Q2, according to preliminary data. The euro zone’s flash composite Purchasing Managers' Index dropped to 50.3 in Jun from 52.8 in the previous month. This was below the 52.5 expected. A reading above 50 marks an expansion in activity, while one below 50 marks a contraction. “Eurozone business output growth came close to stalling in June, according to the latest HCOB flash PMI survey data produced by S&P Global, pointing to renewed weakness in the economy after the brief growth revival recorded in the spring,” S&P Global said. “Although energy and supply chain worries have eased since late last year, June has seen a further escalation of concerns over demand growth, and in particular the impact of higher interest rates, and the resulting possibilities of recessions both in domestic markets and further afield.” Chris Williamson, chief business economist at S&P Global Market Intelligence, described the numbers as “worrying.” “Higher interest rates, the rise in the cost of living, all beginning to take their toll,” he said. The ECB has been increasing interest rates consistently for the past 12 months in an effort to bring down inflation. Higher rates can lead to higher costs for companies across the bloc, however, & so often become a drag on output. On a country-by-country basis, data earlier in the day from Germany also showed a slowdown in Europe's largest economy. The German flash composite PMIs fell to 50.8 in Jun from 53.9 in May, below market expectations. “These data are consistent with our view that GDP (gross domestic product) growth in Germany will remain subdued in second and third quarters after the economy registered a technical recession,” Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, said. Germany entered a technical recession in Q1 after contracting 0.3% over the 3-month period. In Q4-2022, Germany's economy shrunk by 0.5%. It was a similar story in France, where the composite PMI sunk to 47.3 from 51.2 in May, well below the 51 expected. This was primarily due to weakness in the services sector.
European business activity slows as higher interest rates begin to bite
New rules expected to require that banks keep more capital almost certainly won’t apply to smaller institutions, Federal Reserve Chair Jerome Powell said. Addressing concerns over proposals to tighten the reins on bigger banks, Powell told members of the Senate Banking Committee that the rules are still in draft stage. At the same time, he also raised concerns about what impact higher capital requirements would have on lending. “More capital means more stable banks and stronger banks, but there’s also a trade-off there,” he said. “You’ve got to make a judgment about where you draw that line.” In Powell's understanding, banks below $100B in assets won't be affected by any new requirements. That provided some relief for Rep lawmakers who questioned whether the changes were necessary, as Powell faced questions about the future of regulation & supervision. If that's the case, the new rules would affect the top 25 or so banks in the US. Lawmakers & Biden administration regulators have been pushing for a return to more stringent requirements after larger regionals were given a break in changes made in 2018. In separate testimony, FDIC Chair Martin Gruenberg said the upcoming rules could apply Basel III intl standards to banks in the $100-250B asset range. The changes are not expected to be applied until sometime in 2024. Michael Barr, the Fed's vice chair for supervision, has said they likely will take years to implement fully. “The capital requirements will be very, very skewed to the eight largest banks,” Powell said. “There may be some capital increases for other banks. None of this should affect banks under $100 billion.” Even with the exemption for smaller institutions, the looming changes represent an adjustment in thinking that Powell previously had supported, specifically that regulations should be tailored for both small & midsized banks. Gruenberg's comments, for instance, “support our view that banking regulators are biased toward higher capital levels,” Raymond James' Washington policy analyst Ed Mills said. The American Bankers Association (ABA) criticized the move toward increase requirements that have been reported to be 20% higher. “We have long believed that regulation should be tailored to a bank’s risk and business model,” ABA Pres Rob Nichols said. “Arbitrary asset thresholds and changes not justified by rigorous data and evidence are a mistake that will only make it harder for banks of all sizes to meet the needs of their customers, clients and communities while driving financial activity to less-regulated nonbanks.”
Fed Chair Powell says smaller banks likely will be exempt from higher capital requirements
Treasury yields fell as investors digested remarks from Federal Reserve officials about the outlook for interest rates and the latest economic data. The yield on the 10-year Treasury was down by 6 basis points at 3.735% & the 2-year Treasury yield was trading at 4.75% after declining by 5 basis points. Yields & prices move in opposite directions & 1 basis point equals 0.01%. Investors digested comments that Fed speakers including Chair Jerome Powell made throughout the week, which indicated that further interest rate hikes are on the horizon. Powell suggested policymakers would continue using interest rate increases to bring down inflation. However, compared with last year, there is now less urgency to “move quickly,” he said, adding that economic data would play a key role in the Fed's decision-making. That comes after Powell said Wed that the Fed’s battle with inflation still “has a long way to go.” Fed Governor Michelle Bowman echoed Powell's comments on yesterday, saying she believed rates need to go higher still to become “sufficiently restrictive” & push inflation closer to the central bank’s 2% goal. Investors also considered the latest economic data, with the initial weekly jobless claims figure coming in above expectations at 264K & interest rate decisions from central banks around the world.
Treasury yields decline as investors digest Fed official comments
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