The astonishing rally in China’s equity market has given way to a jolting correction, with the Shanghai Composite Index falling more than 20% just since June 12. This article examines some possible explanations for the recent volatility and details the latest efforts of China’s authorities to stem the declines, including an interest rate cut and words of encouragement from the spokesman of the China Securities Regulatory Commission over the weekend. The selling pressure finally showed some evidence of subsiding last night as Chinese equities jumped more than 5%.
The Greek bailout negotiations took a dramatic turn for the worse over the weekend when Alex Tsipras, the Greek prime minister, unexpectedly decided to halt negotiations and call for a July 5th referendum on the proposals being offered by Greece’s creditors. The response from the creditors was swift and included a withdrawal of the deal being offered to Greece. The European Central Bank also put a cap on the amount of money that Greek banks can borrow from the Bank of Greece. Bank runs quickly ensued and capital controls were put in place to limit the amount of money Greek depositors can withdraw on a daily basis. This article from The Economist summarizes the latest developments and explains how next weekend’s referendum is now largely being viewed as a vote on whether Greece will remain in the European Union.
The likelihood of a Federal Reserve interest-rate hike this fall increased following an impressive rise in payrolls in May, providing evidence the U.S. labor market is re-accelerating following a weak first quarter. The U.S. economy added 288,000 jobs in May and wage growth increased. Federal Reserve Bank of New York President William C. Dudley is encouraged by the improving labor market, stating, “it is likely that conditions will be appropriate to begin monetary policy normalization later this year.” The U.S. economy contracted by 0.7% in the first quarter, but the weakness is widely considered temporary and a result of harsh winter weather and the labor dispute at West Coast ports. Recent economic data has been supportive of faster economic growth in the second quarter, including better-than-expected growth in housing, construction, auto sales, employment, and manufacturing.
This article sheds light on the inner workings of the U.S. Federal Reserve and the power structure behind interest-rate decision-making. It points out that the Fed’s smaller Board of Governors (BOG), five of its Federal Open Market Committee’s (FOMC) 10 members, will control the rate paid on bank’s reserves held at the Fed. Since open market operations are no longer sufficient to drive the cost of borrowing in the federal funds market to the FOMC target, the BOG will be able to essentially set overnight rates. So, while improving economic data may increase the probability of an initial rate increase in the fall of 2015, since the BOG is considerably more dovish than the FOMC, Fed watchers may be overestimating the pace of rate increases because they are focusing on the wrong committee.
This research piece from the Federal Reserve Bank of San Francisco looks at one element that continues to suggest significant slack remains in the labor market, which is the prevalence of involuntary part-time work. The research attempts to separate involuntary part-time work into cyclical factors, which are likely to reverse as the economy strengthens, and structural forces which are likely to persist even when the economy is at full employment. The conclusion is that both cyclical and structural factors are at work, but importantly, it appears that cyclical involuntary part-time work remains very elevated relative to pre-recession levels. The implication of this finding is that slack remains in the labor market despite strong recent job gains. This slack is one reason to believe the Fed will pursue a very gradual path of interest-rate increases once it begins its tightening cycle.