The European Central Bank and the Bank of Japan raised interest rates in June, breaking with the traditional central bank practice of ignoring geopolitical supply shocks, as war-driven energy price pressures intensified. The ECB raised its key rate by 0.25 percentage points in June, marking its first increase in 2 years and 9 months, while the BOJ lifted its rate to 1.0% in June, the highest level in 31 years. Meanwhile, US nonfarm payrolls added only 57,000 jobs in June — half the 113,000 forecast — and 700,000 people exited the labor force, prompting market expectations that the Federal Reserve will hold rates steady in July. Asset manager Northern Trust warned in a mid-year report that 'war is hell,' as central banks abandon longstanding policy frameworks in response to sustained energy shocks from the Hormuz Strait blockade.
ECB and BOJ Raise Rates in June Amid Energy Price Pressures
The ECB moved first, raising its key rate by 0.25 percentage points in June after a 2-year and 9-month pause. ECB President Christine Lagarde had maintained in March that the central bank would ignore the shock, but reversed course as the Hormuz Strait blockade prolonged and energy prices remained elevated. The BOJ followed in June, lifting its key rate from 0.75% to 1.0% — the highest level in 31 years. Both institutions cited the intensity of war-driven energy price shocks as justification for abandoning the traditional monetary policy approach of not responding to temporary geopolitical supply disruptions.
US June Employment Data Falls Short of Forecasts
US nonfarm payrolls increased by 57,000 in June, exactly half the market forecast of 113,000. The leisure and hospitality sector shed 61,000 jobs despite expectations of a World Cup-related boost. The unemployment rate declined from 4.3% to 4.2% in June, but ING warned that the improvement reflects 700,000 people exiting the labor force rather than job gains. Labor force participation among core working-age groups also declined. Adam Saran, CEO of 50 Park Investment, stated that while inflation concerns have not completely disappeared, the employment slowdown has significantly reduced near-term pressure on the Fed to raise rates.
CME FedWatch Shows 78.1% Probability of July Rate Hold
The CME FedWatch tool shows a 78.1% probability of a July rate hold as of July 5, up from 70.1% one week earlier. Expectations for a rate cut have disappeared entirely. A Bank of Korea New York office survey found that 9 out of 10 Wall Street institutions have abandoned expectations for US rate cuts this year. Deutsche Bank forecasts two additional rate hikes in the second half of the year, while Bank of America expects three hikes despite labor market softening. Citigroup postponed its first cut forecast from September to October, followed by cuts in December and January of next year. PGIM proposed a scenario of three hikes this year followed by cuts next year if a recession materializes. Anshul Sharma, CIO of Sabewell, noted that if consumer price index inflation stabilizes alongside the current tightening stance, technology stocks reflecting long-term growth could benefit.
Fed Speeches and FOMC Minutes Scheduled for July 7–10
Fed Chair Kevin Walsh stated that the FOMC will close the door and engage in thorough debate in four weeks, providing no policy hints. Christopher Waller, Fed Governor, is scheduled to speak publicly on July 7. The June FOMC meeting minutes — the first under Chair Walsh — will be released early on July 9. John Williams, President of the New York Fed, is scheduled to speak publicly on July 9, and Lorie Logan, President of the Dallas Fed, on July 10.
FAQ
What did the ECB and BOJ do in June?
The European Central Bank raised its key rate by 0.25 percentage points in June, the first increase in 2 years and 9 months. The Bank of Japan raised its key rate to 1.0% in June, the highest level in 31 years. Both moves were responses to prolonged war-driven energy price shocks.
Why did US June employment data fall short of forecasts?
US nonfarm payrolls added only 57,000 jobs in June, half the 113,000 forecast. The leisure and hospitality sector lost 61,000 jobs despite World Cup expectations. The unemployment rate decline from 4.3% to 4.2% reflected 700,000 people exiting the labor force rather than job creation, according to ING.
What is the market expectation for the Fed's July rate decision?
CME FedWatch shows a 78.1% probability of a July rate hold as of July 5. Rate cut expectations have disappeared, and 9 out of 10 Wall Street institutions surveyed by the Bank of Korea's New York office have abandoned forecasts for US rate cuts this year.
