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Lael Brainard Discusses Digital Dollar; Russia's Ruble Strength; Bank of Mexico Considers Bigger Rate Rises

By James Christie

 

Good day. Federal Reserve Vice Chairwoman Lael Brainard weighed in on the idea of a U.S. central bank digital currency during a congressional hearing, saying: “It could provide a safe, central bank liability as the neutral settlement layer in the digital financial ecosystem.” She added that a digital currency "would actually facilitate and enable private-sector innovation.” Meanwhile, Russia's ruble has strengthened to levels not seen since 2018 after its initial drop following the country's invasion of Ukraine. And Bank of Mexico officials signaled they could consider bigger rate increases.

Note to readers: The Pro Central Banking newsletter won't be published Monday in observance of Memorial Day in the U.S. We will be back on Tuesday.

Now on to today’s news and analysis.

 

Top News

Digital Dollar Could Coexist With Stablecoins, Lael Brainard Says

Fed Vice Chairwoman Lael Brainard said a central bank digital currency could ensure the dollar’s continued global reserve status. PHOTO: JIM LO SCALZO/SHUTTERSTOC

A U.S. central bank digital currency could one day provide consumers with a level of safety amid a proliferation of privately issued digital assets such as stablecoins, Federal Reserve Vice Chairwoman Lael Brainard told House lawmakers.

Ms. Brainard told the House Financial Services Committee that in the future a central bank digital currency could coexist with and be complementary to stablecoins by providing a widely available, government-backed means of payment.

What is a Central Bank Digital Currency and Should the U.S. Issue it?

The Biden administration and the Fed are evaluating the potential creation of a U.S. digital dollar, backed by the central bank. Here’s what you need to know about the potential issuance of a U.S. central bank digital currency.

 

U.S. Economy

Mortgage Rates Drop for Second Week in a Row

Mortgage rates are starting to decline after hitting levels unseen in more than a decade, potentially providing relief to Americans struggling to afford homes in a market where demand far outpaces supply. The average rate on a 30-year fixed-rate mortgage fell for the second week in a row to 5.10%, Freddie Mac said Thursday, following their steepest rise in decades. Rates peaked at 5.3% earlier in May, the highest level since 2009 and well above the 2.94% average rate a year earlier.

  • Bets Against U.S. Treasurys Rake In Gains as Fed Raises Rates
  • SPACs Are Warning They May Go Bust
 

Jobless Claims Dropped Last Week and Remain Near Historic Lows

New applications for unemployment benefits fell last week and hovered near historic lows in a sign of a tight U.S. labor market. Initial jobless claims, a proxy for layoffs, decreased to 210,000 last week from the previous week’s level of 218,000, the Labor Department said. Claims remain near 2019 prepandemic levels, when the job market was also historically tight. The four-week average for claims, which smooths out volatility in the weekly figures, rose to 206,750 last week.

 

Key Developments Around the World

Bank of Mexico Minutes Show Bigger Rate Rises May Be Considered

A majority of the Bank of Mexico’s board members agreed they should at least consider stepping up the size of interest-rate increases to tame inflation, minutes to this month’s meeting showed.

Japan Reopens to Some Tourists, With Low Prices a Lure

Amid pressure from business groups calling for an economic lift, Japan said Thursday that it would reopen to tourists on guided trips for the first time since early 2020, hoping that the cheap yen will lure bargain-hunting visitors.

Europe’s Quest for Gas Alternatives Hits Obstacles in Middle East

Europe is hitting roadblocks as it tries to find alternatives to Russian gas in the Middle East and North Africa, as talks with big producers like Qatar, Algeria and Libya have run into a range issues snarling negotiations.

  • Little-Known Commodity Traders Help Russia Sell Oil

Russia’s Economy Is Tanking but the Ruble Soared. Here’s Why.

Sanctions against Russia have pushed its economy into what could be the biggest decline in decades, but the country’s currency has gone the other way. The ruble strengthened this week to levels not seen since 2018, making the currency the second-best performer against the dollar this year, based on a Dow Jones Market Data analysis of 56 currencies. The ruble is up 16% against the greenback in 2022 and up nearly 150% since bottoming out days after Russia’s invasion of Ukraine.

  • Russia Inches Closer to Encircling Ukrainian Troops
  • Ukraine Slams Idea of Swapping Land for Peace
  • For the latest updates on Russia and Ukraine click here.
 

Financial Regulation Roundup

Accounting Firm EY Considers Split of Audit, Advisory Businesses

Big Four accounting firm Ernst & Young is considering a world-wide split of its audit and advisory businesses amid regulatory scrutiny of potential conflicts of interest in the profession, according to people familiar with the matter.

Oil Giants to Be Hit by Windfall Tax in U.K.

The U.K. said it would impose a temporary levy on oil-and-gas producers to help soften the pain of soaring energy prices on consumers, a rare so-called windfall tax aimed at blunting a worsening cost-of-living crisis.

 

Forward Guidance

Friday (all times ET)

7:35 a.m.: ECB’s Lane in policy panel discussion at 2022 BOJ-IMES Conference

Monday

Memorial Day holiday in the U.S.

 

Commentary

Davos Elite Can’t Agree About the Economy and Neither Can Markets

The “Davos consensus” can be a useful contrarian indicator since it is often entirely wrong, but there isn’t a consensus this year, which helps explain the jumbled state of markets, James Mackintosh writes.

 

Basis Points

  • The U.S. economy contracted by a 1.5% annual rate in the first quarter, new government figures showed, largely because of a record trade deficit. The decline in GDP was revised from a previously estimated 1.4% dropoff. (Dow Jones Newswires)
  • Manufacturing activity in the central U.S. cooled in May from April, although it continued to expand at a solid clip, according to the Federal Reserve Bank of Kansas City. Its Tenth District manufacturing survey’s composite index decreased from 25 in April to 23 this month, broadly in line with the 22 consensus forecast from economists polled by The Wall Street Journal. (DJN)
  • Pending home sales in the U.S. continued their downward trend in April, falling for a sixth straight month amid rising mortgage rates, according to the National Association of Realtors. Its Pending Home Sales Index based on contract signings decreased 3.9% to 99.3 in April on month, its lowest level since April 2020. Economists polled by The Wall Street Journal expected sales to fall 2% on month. (DJN)
  • China’s industrial profit slid in April as the country grappled with Covid-19 lockdowns in Shanghai and other cities, which wreaked economic havoc. Profits at China’s industrial firms dropped 8.5% in April, reversing from 10.6% growth in March, the National Bureau of Statistics said. Industrial profit increased 3.5% in the first four months of the year, slowing from 8.5% growth in the first quarter. (DJN)
  • The U.K.’s additional fiscal package will neither change the aggregate picture of the economy nor the Bank of England’s stance, Citi economist Benjamin Nabarro said, noting the package is expected to add 0.2% to the economy over the next year. (DJN)
  • Australian retail sales rose to another record level in April, underscoring the strength of consumer spending as disruptions from the pandemic ease and official interest rates remained close to zero. Retail turnover rose 0.9% in April, building on a 1.6% rise in March, and a 1.8% rise in February, the Australian Bureau of Statistics said. (DJN)
  • Canadian retail sales missed growth expectations in March and fell in the month on a price-adjusted basis. Hefty sales at gasoline stations, buoyed by higher prices, were offset by the largest decline at motor vehicle and auto-parts dealers since the onset of the Covid-19 pandemic, Statistics Canada said, noting retail sales in March were largely unchanged, at 60.09 billion Canadian dollars, or the equivalent of $46.89 billion. (DJN)
 

Feedback Loop

This newsletter is compiled by James Christie in San Francisco.

Send us your tips, suggestions and feedback. Write to:

James Christie, Jon Hilsenrath, Michael S. Derby, Nell Henderson, Nick Timiraos, Paul Hannon, Kim Mackrael, Tom Fairless, Megumi Fujikawa, Perry Cleveland-Peck, Michael Maloney, Paul Kiernan, James Glynn

Follow us on Twitter:

@WSJCentralBanks, @NHendersonWSJ, @michaelsderby, @NickTimiraos, @PaulHannon29, @kimmackrael, @TomFairless, @megumifujikawa, @pkwsj, @JamesGlynnWSJ, @cleveland_peck

 
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