The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
New data suggests that business spending on equipment in the United States may be losing momentum, as key indicators for July showed unexpected declines. This trend could signal a cooling in capital investment as the economy transitions into the third quarter.
Key Highlights:
Decline in Core Capital Goods Orders: Non-defense capital goods orders excluding aircraft, a key proxy for business spending, fell by 0.1% in July. This was an unexpected decline, as economists had forecast no change following a previously reported 0.9% increase in June. However, June’s data was also revised downwards to show a 0.5% increase.
Impact on Business Investment: The drop in core capital goods orders suggests that the strong business investment seen in the second quarter, where spending on equipment saw double-digit growth, might be slowing. This comes despite the Federal Reserve’s significant interest rate hikes over the past two years, which had previously not fully dampened spending.
Economic Growth and Fed’s Response: Business investment in equipment had contributed to the 2.8% annualized growth rate of the U.S. economy in the second quarter. However, the recent cooling in spending may influence the Fed’s monetary policy, as indicated by Fed Chair Jerome Powell’s recent comments suggesting imminent rate cuts. Financial markets are anticipating a 25-basis-point rate reduction by the Fed next month, though a 50-basis-point cut is also possible.
Durable Goods Orders: Despite the cooling in core capital goods, overall durable goods orders surged by 9.9% in July, rebounding from a revised 6.9% decline in June. This increase was largely driven by a 34.8% rebound in transportation orders, including a notable rise in defense aircraft orders.
Sector-Specific Trends:
- Machinery Orders: These remained unchanged in July.
- Computers and Electronics: Orders in this category dropped by 0.7%.
- Electrical Equipment, Appliances, and Components: These orders fell by 0.4%.
- Primary Metals: There was also a decrease in orders.
- Fabricated Metal Products: Orders in this category saw a slight increase of 0.2%.
Outlook for Q3: Despite the decline in July, some analysts believe that equipment investment could still post a modest gain in the third quarter, though the recent data indicates that growth may not be as robust as in previous periods.
The recent cooling in business spending on equipment may reflect a cautious approach by companies amid economic uncertainties and high borrowing costs. The Fed’s upcoming policy decisions will be closely watched as they respond to these economic signals.
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