The Federal Reserve has certainly generated a response with this campaign to lift interest rates. The housing market is weakening. Stocks are getting crushed. Crypto is convulsing.
One less-discussed side effect is the strength of the dollar, which, because it is the only truly global reserve currency, affects the whole world. As Richard Nixon’s Treasury Secretary John Connally put it in 1971: “The dollar is our currency, but it’s your problem.”
The Fed is planning to hike further and faster than almost anyone else. That increases the relative returns on dollar investments, leading the U.S. currency to strengthen. The dollar index—a measure against a basket of other currencies—has gained almost 17% in the past year.
That increases the cost of doing business internationally for overseas companies, as many cross-border contracts are priced in dollars. It also means that other countries end up importing inflation as the cost of goods priced in dollars—oil, for example—goes higher.
Other central banks’ rate increases aren’t having much of an impact on their currencies. The Bank of England, which moved earlier than the Fed way back in December, has still watched the pound fall 11% this year. It will probably raise rates again on Thursday, even though its own forecasts show a strong risk of recession.
European Central Bank policy makers, meeting in an emergency session Wednesday, will surely discuss the impact of the euro’s steady decline, with some analysts predicting parity with the dollar later this year.
In 1985, the dollar’s strength became such an issue for the global economy that leaders of the five biggest economies agreed on coordinated interventions to weaken it. It isn’t hard to imagine needing a new, innovative solution if current trends continue.
*** Join Quentin Fottrell, managing editor, personal finance at MarketWatch, today at noon as he talks with Greg Robb, senior reporter in Washington, D.C., and Andrew Keshner, a reporter who specializes in personal finance and retail investment, about a summer of inflation. Sign up here.
European Central Bank Calls Emergency Meeting
The ECB is holding an emergency meeting after Italian government bond yields surged above 4% and the difference between German yields and others’ widened. “The Governing Council will have an ad hoc meeting on Wednesday to discuss current market conditions,” an ECB spokesperson confirmed in an email.
- A selloff in German, French, and Italian bonds started last week after the ECB pledged to raise rates next month for the first time in more than a decade. The selloff was over concerns about borrowing costs rising too high in countries that are weaker economically than Germany, such as Italy and Greece.
- The central bank for 19 European countries said it is working on a tool to reduce the spreads between diverging yields, but has yet to give any details on it. The euro rose on the news, climbing as much as 0.6% to $1.0480.
- ECB President Christine Lagarde had last week promised an aggressive approach, with two consecutive quarter-point hikes, followed by a half-point increase in September. But the ECB is starting its cycle of rate increases later than the U.S.
What’s Next: The ECB’s next scheduled policy meeting isn’t until July 27. It may decide to reveal how it intends to contain bond market spreads before then, if turbulence continues.
Mortgage Rates Hit 6% as Housing Market Hits a Wall
Mortgage rates have doubled since the start of the year, with lender Rocket Mortgage quoting a 6.25% interest rate for 30-year fixed-rate mortgages for new home purchases. Higher borrowing costs could further stretch housing affordability, push more buyers to the sidelines, and cool off the heated housing market.
Home building stocks are languishing.
is down 6% over the past month,
shares are down 8%, and
shares are down 3.8% over the same period.
Recent data suggest that home sales have already slowed, and online real estate brokers are feeling the pain.
is cutting 8% of its employees, citing market conditions.
is cutting 10% of its workforce.
Home building stocks are also dragging. The
iShares U.S. Home Construction
exchange-traded fund hit a new 52-week low on Tuesday, now down 35% from its December high.
- Active home listings have increased from the same period last year for the fifth consecutive week, according to Realtor.com data. For the first time in seven weeks, median listing price growth slowed, but stayed well above the historic norm. (Realtor.com is operated by the same parent company as Barron’s.)
What’s Next: The National Association of Home Builders’ Housing Market Index, which gauges builders’ confidence in market conditions, will release its number for June later this morning. Analysts expect a reading of 68, down from 69 for May.
Caterpillar Is Latest Manufacturer Moving to Texas
is moving its headquarters to Irving, Texas——a suburb of Dallas——following the footsteps of other major manufacturers that have relocated over the past year. The producer of the yellow construction and mining equipment said the move is “in the best strategic interest of the company.”
- The move is a blow to Illinois, home to the manufacturing giant—with more than 107,000 employees globally—for nearly a century. Caterpillar was based in Peoria for many decades before shifting its headquarters to Deerfield, a Chicago suburb, in 2018.
and information technology giant
both relocated to Austin from California in the past year. Texas is known for cheaper living costs, lower taxes, and less stringent regulation.
Virginia is another popular destination. Aerospace defense giants
both announced plans recently to move headquarters to the Arlington-area of Virginia, where many military contractors are already based for its proximity to the federal government.
- Caterpillar stock remains largely flat year to date as most corners of the market are sinking. The company reported $13.6 billion in revenue for the first quarter of 2022, up by 14% from the same period last year. At its investor day in Dallas in May, it introduced a new $15 billion stock buyback plan, about 13% of the company’s market capitalization.
What’s Next: Despite investor concerns for a potential recession caused by aggressive rate increases, Wall Street analysts remain bullish on Caterpillar’s short-term outlook, expecting to see $56.8 billion revenue for fiscal 2022, 11% higher than 2021.
FedEx Joins Crowd of Companies Offering Bigger Payouts
Global logistics company
is going to raise its quarterly dividend by 53%, a sure sign of confidence despite growing worries about a recession about to hit the U.S. economy. It is also adding three directors to its board in an agreement with activist investor DE Shaw.
- FedEx’s dividend will rise to $1.15, far exceeding the size of the increase FedEx announced a year ago, when it declared a quarterly payout of 75 cents a share. It wants its capital allocation to reflect “confidence in the trajectory of the business.”
is raising its dividend 20%, to $1.08 a share even though it is slashing prices of goods for sale to clear out inventory after disappointing fiscal first-quarter earnings.
Packaging Corp. of America
is raising its dividend 25%, to $1.25 a share. And
Host Hotels & Resorts
a lodging real estate investment trust, is doubling its dividend to 6 cents.
As of May 9, the average dividend increase this year among
companies was 13.4%, according to S&P Dow Jones Indices. It was 11.8% for all of 2021 and 8.6% in 2020, when many companies suspended or cut their dividends.
United Parcel Service
shareholders got a 49% dividend bump, the biggest payout increase in its history as a public company, as it forecast annual revenue will reach $102 million in 2022.
—Liz Moyer and Lawrence C. Strauss
Chinese Stocks Show Signs of Rebound as Restrictions Ease
Electric vehicle maker
is expected to reveal a highly anticipated ES7 SUV today, in the hope it will drive new sales through 2022. Confidence about China may also be encouraging investors about its stock and that of other Chinese companies.
NIO stock rose 16.7% on Tuesday as investors start to reassess Chinese stocks. The
iShares MSCI China
ETF rose 3% after falling 35% over the past year. Tuesday’s gain also applied to
up nearly 11%,
up 7.5%, and
- Chinese stocks have been pummeled lately but after another set of Covid-19 lockdowns, its economy is reopening. Officials also are taking steps to ease monetary conditions as the Federal Reserve is set to raise interest rates by the most since the 1990s.
Policy makers appear to be taking steps that suggest the technology sector crackdown in China could be coming to an end. China recently approved the first big batch of videogames since imposing restrictions on children last summer. The
KraneShares CSI China Internet
ETF was up 6.7% on Tuesday.
What’s Next: Chinese officials are intent on powering up the country’s fiscal and monetary stimulus after the easing of Covid-19 restrictions that had paralyzed manufacturing areas. Economists have been skeptical that China can reach its 5.5% economic growth goal, but policy makers are eager to try.
—Liz Moyer and Ben Levisohn
There’s been a property in our family going back decades. It was actually split into four equal parts among the original owners, who have now all passed away. So the kids of the owners have the rights to the property. They each have 25%.
My grandma and her son (my uncle) were living there rent-free for decades until my grandma passed away a couple years ago, and now the other family members want their part of whatever the value of the home is.
Not one sibling wants to pony up the money to purchase the property. One of these siblings—my uncle—still lives at the property, lives off Social Security (about $800 a month), and really has no desire to have any type of job for an income.
My dad has put more than $100,000 into it so far. He’s going through all this trouble of contacting long-lost family members to get their signatures for his purchase of the property in exchange for the money due to them from the property.
My dad just wants the property clean, so he can eventually take out a loan to build a house on the land so he can resell it.
—Frustrated Family Member
Read The Moneyist’s response here.
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—Newsletter edited by Liz Moyer, Camilla Imperiali, Steve Goldstein, Rupert Steiner