| Hello. Today we look at where higher US interest rates may already be impacting markets and the economy, how BlackRock suspects we're entering a new regime for central banks and what the impact of China's new quarantine rules will be on growth. Coming Up: One of the most successful initiatives to avert a financial meltdown when the Covid crisis struck in March 2020 was a Federal Reserve program to buy corporate debt. The announcement effect itself proved so powerful that in the end the Fed didn't even have to buy much — markets had already taken care of themselves. Something similar may be at work right now for the Fed, this time in its fight against inflation. The Fed has only boosted its key policy target to 1.75%, leaving it still way below the 8%-plus US inflation rate. But the plans to do a whole lot more, laid out by Chair Jerome Powell and his colleagues, are helping the Fed's moves pack a much bigger punch. "The old belief that monetary policy works with a lag, and it's nine-to-12 months after the Fed hikes" before the effects are felt may no longer hold, according to Brian Rose, senior economist at UBS Group AG's Chief Investment Office. "In this case because the Fed has been unusually transparent with its forecast guidance with the market aggressively pricing in rapid rate hikes — so already financial conditions have tightened."
Three channels of impact stand out to Michael Feroli, chief U.S. economist at JPMorgan Chase: The Dollar "The real, trade-weighted dollar, is pretty significantly" affecting the US, Feroli said on Bloomberg TV on Tuesday. It's going to hit "external performance," he said — suggesting that the gain in exports seen in the latest trade data may not last. Feroli anticipates a slowdown in the broader factory sector. He also noted that the appreciating dollar is blunting the rising cost of imported goods. Import prices rose by less than 1% on a monthly basis for April and May, down from an average of more than 2% in the first three months of the year. Housing Correction Mortgage rates have soared by much more than the Fed's policy rate. Thirty-year fixed rate mortgages now average 5.81%, up about 2.7 percentage points since the end of December. That compares with the 1.5 percentage point bump in the Fed's rate. "We're seeing the mortgage-rate effect already having a pretty pronounced effect on housing activity," Feroli said. Mark Zandi, chief economist at Moody's Analytics, recently predicted a housing correction from "coast to coast." Wealth Effect The third channel by which Fed policy is having an amped-up effect is the hit to households' financial wealth. The US equity market capitalization contracted by more than $11 trillion from the end of last year through Monday. Bonds have also seen major losses. The classic 60/40 portfolio — where 60% is invested in stocks and 40% in bonds — is down nearly 16% in the first six months of the year so far. That's the steepest first-half loss since 1988, according to data compiled by Bloomberg. For those fearing that the Fed is far behind the curve in its inflation battle, it's worth keeping in mind these powerful extra levers at work. But, one word of warning comes from Steve Englander of Standard Chartered Bank. He worries markets may declare victory too soon, triggering an "asset market ebullience" that may prompt the Fed to move even more forcefully. Look out for more Fed policy signaling on Wednesday, when Powell speaks alongside fellow central bankers at the annual Sintra, Portugal, conference. —Chris Anstey China's reduction in quarantine times for inbound travelers is boosting sentiment, but the change will likely have a modest impact on the world's second-largest economy unless more dramatic measures are taken. That's the view from economists, who are holding firm on their GDP growth forecasts for now after China halved its quarantine time to seven days, with a further three days of at-home monitoring. Most of them said that while the revisions signal Beijing is taking a more practical approach to its Covid Zero policy, it's still too early to anticipate an end to that strategy anytime soon. The government's growth target of around 5.5% for the year also remains a significant challenge, they added. Read more here  | - Bleaker outlook | Morgan Stanley economists said they now expect the euro area to fall into a "mild" recession in the final quarter, while the French government slashed its economic growth forecast.
- Europe inflation | Spanish inflation unexpectedly surged to a record, defying government efforts to rein it in. Meanwhile in Germany, industrial companies expect the supply-chain issues that have disrupted production in Europe's biggest economy to hamper output for at least 10 more months.
- Brighter outlook | Federal Reserve officials played down the risk that the US economy will tip into recession, even as they raise interest rates with another 75 basis-point hike on the table next month. Cleveland Fed President Loretta Mester told CNBC she wants to see the benchmark lending rate reach 3% to 3.5% this year.
- Bulging warehouses | Responsible for 42% of all containerized trade with Asia, the US's largest hubs of Los Angeles and Long Beach in Southern California are dealing with an influx of cargo.
- Chips to Rolexes | While the world watches to see if we've reached peak inflation or not, all kinds of lines and charts are already rolling over.
- Vietnam growth | Vietnam's economy grew at the fastest pace in nearly a decade in the second quarter, thanks to a rebound in exports and manufacturing that helped offset risks from coronavirus outbreaks.
- UK food prices | The price of basic goods in UK stores is rising at the fastest pace in almost 14 years, leaving poorer families taking drastic action to make ends meet, according to surveys published Wednesday.
- California dreaming | States' efforts to provide inflation relief to US consumers with tax rebates may go over well with recipients — yet they risk adding more fuel to spending and making life harder for the Fed.
BlackRock strategists are still betting on a "new macro and market regime" in which the Federal Reserve and counterparts will ultimately stop raising interest rates even with inflation above their targets. "The eventual sum total of rate hikes will be historically low given the level of inflation, but brace for volatility in the short run," the strategists said in a report this week.
That's because central banks know hiking rates will trigger a recession and not raising them enough could mean inflation expectations pick up. "It's tough to see a perfect outcome," BlackRock said. "The Fed has made clear it is ready to dampen growth. It has projected a large and rapid increase in rates, raising rates by 0.75% in June in the largest increase since 1994. We ultimately think reality will come knocking and a stall in the restart will make the Fed change course."
As for the European Central Bank, it may be underappreciating the risk of an energy crunch pushing its economy into a recession which will force it to rethink its rate path, the strategists said. And they argued the Bank of England may already be pivoting towards being more dovish. Read more reactions on Twitter | 
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