InvestMacro

By JustMarkets

The US stock markets continued their rally yesterday. By Thursday’s close, the Dow Jones Index (US30) decreased by 0.11%, while the S&P 500 (US500) gained 1.48%. The NASDAQ Technology Index (US100) jumped by 3.25%.

Investors are investing in tech stocks after the Meta rally. The artificial intelligence technology boom in recent months has forced investors to pour money into technology. The market has also been helped by renewed confidence that the Federal Reserve will stop raising rates sooner than originally planned.

Tesla (TSLA) added another 3% to its recent rally after it was announced that the company would increase production at its Shanghai plant to nearly 20,000 vehicles per week. Apple’s (AAPL) results for the quarter fell short of estimates due to a drop in iPhone revenue. iPhone’s revenue fell about 8% to $65.78 billion amid a difficult macroeconomic environment and significant supply constraints. Apple stock fell by 3% after the report was released. Alphabet (GOOGL) reported lower-than-expected fourth-quarter earnings and revenue as lower spending on online advertising affected results. The company also said its first-quarter results would reflect lower spending related to job cuts. Shares of Alphabet Inc. fell more than 1% on the report. Amazon (AMZN) was also unhappy with the results.

Operating profits continued to fall in the current quarter. Faced with high inflation and a volatile economy, the company has set its sights on cutting costs across various businesses. Shares fell 5% after the market closed. Ford Motor Co (F) said Thursday that fourth-quarter profit fell from a year earlier. The automaker blamed supply chain problems and production “instability, ” leading to higher costs and lower volumes. Ford shares fell more than 6% on the report after the close of the main session.

Stock markets in Europe were mostly up yesterday. Germany’s DAX (DE30) gained 2.16%, France’s CAC 40 (FR40) added 1.26%, Spain’s IBEX 35 index (ES35) jumped by 1.45%, and Britain’s FTSE 100 (UK100) closed Thursday up by 0.76%.

The ECB, as expected, raised its interest rate by 0.5% yesterday. The US Fed is ending its rate hike cycle and will soon talk about ending quantitative easing (QT), with the ECB about halfway through and planning to start QT in March. This situation is good for the euro as the spread between the euro, and the dollar will continue to narrow.

The Bank of England announced another “sharp” interest rate hike on Thursday, saying it was too early to declare victory over inflation. The bank raised its key rate from 3.5% to 4%. Nevertheless, the bank tempered expectations of further rate hikes, dismissing suggestions that it would respond “strongly” to price pressures and implying that future changes would be smaller.

Oil prices fell Thursday as US factory orders fell and the dollar strengthened, making oil more expensive for non-US buyers. This indicates a further slowdown in the economy, especially in manufacturing, which is negatively affecting oil. Investors have become less confident about the strength of the oil outlook. But analysts are still confident in a bullish scenario for the “black gold” due to the rebounding economy of China (the largest oil importer). It is also worth remembering that the ban on Russian oil will come into effect on February 5, which may strike a blow to global supplies.

The unusually warm start to the winter of 2022/23 resulted in a significant reduction in heating demand in the United States and Europe compared to the norm, leaving more gas in storage than originally anticipated. This has led to a drop in natural gas prices over the past two months. But the situation may change dramatically with the onset of cold weather, which weather forecasters predict for the second half of February.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) gained 0.20%, China’s FTSE China A50 (CHA50) decreased by 0.34%, Hong Kong’s Hang Sengv(HK50) lost 0.52%, India’s NIFTY 50 (IND50) fell by 0.03%, and Australia’s S&P/ASX 200 (AU200) was up by 0.13% on the day.

The mixed economic data released reinforced concerns about China’s rapid recovery after the repeal of the zero COVID-19 policy. While the country’s services sector recovered sharply in January after a four-month slump, a private survey showed that small-scale manufacturing firms still struggle with rising COVID-19 cases and lingering supply chain problems.

Severe flooding in New Zealand’s largest city, Auckland, has increased inflationary pressures and is creating a new cost-of-living headache for Prime Minister Chris Hipkins, who is trying to win back support for his party before the election.

S&P 500 (F) (US500) 4,179.76 +60.55 (+1.47%)

Dow Jones (US30) 34,053.94 −39.02 (−0.11%)

DAX (DE40) 15,509.19 +328.45 (+2.16%)

FTSE 100 (UK100) 7,820.16 +59.05 (+0.76%)

USD Index 101.74 +0.53 (+0.53%)

• – Eurozone Services PMI (m/m) at 11:00 (GMT+2);
• – UK Services PMI (m/m) at 11:30 (GMT+2);
• – Eurozone Retail Sales (m/m) at 12:00 (GMT+2);
• – Eurozone Producer Price Index (m/m) at 12:00 (GMT+2);
• – US Nonfarm Payrolls (m/m) at 15:30 (GMT+2);
• – US Unemployment Rate (m/m) at 15:30 (GMT+2);
• – US ISM Services PMI (m/m) at 17:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By William Chittenden, Texas State University 

The Federal Reserve’s policy-setting committee lifted interest rates on Feb. 1, 2023, by a quarter of a percentage point to a range of 4.5% to 4.75%. The increase, the smallest since the Fed began an aggressive campaign of rate hikes in March 2022, came amid signs the fastest pace of inflation in decades is cooling. But the Fed also indicated more rate hikes are coming.

So why is the Fed slowing the size of rate increases now, and what does it mean for consumers? We asked finance scholar William Chittenden from Texas State University to explain what’s going on and what comes next.

Why did the Fed raise rates by only a quarter point?

The Fed is trying to figure out whether last year’s rate hikes have slowed the economy enough to get inflation near its target of about 2%.

By raising what’s known as the Fed funds rate, the U.S. central bank makes borrowing more expensive, which means buying large-ticket items, like cars and homes, is more costly. This should lead to fewer people buying cars, which will likely result in lower car prices.

In 2022, the Fed lifted rates eight times by a total of 4.25 percentage points, which helped prompt inflation to drop to an annual pace of 6.5% in December from 9.1% at its peak in June.

To understand why it’s so hard for the Fed to figure out if its rate hikes worked, think of the economy as a fully loaded oil tanker out in the ocean. Naturally, it’s chugging along as fast it can to reach a specific destination, but it takes a long time from the captain “stepping on the brakes” to when the ship actually stops moving forward.

Similarly, the Fed is raising rates to slow the economy – sort of like stepping on the brakes – and bring inflation down to 2%, but there’s often a long delay between the hikes and their impact on the economy.

But if the Fed eases off the brakes too early, inflation could remain high. If it presses on them too hard, unemployment will likely shoot up and the economy will slide into a recession. By increasing interest rates only a quarter-point, the Fed is signaling that it believes the economy has begun to slow down and is on a path to 2% inflation.

Does this mean borrowing costs will start coming down?

The Fed funds rate acts as a base rate for shorter-term interest rates, such as for car loans and credit cards. As it goes up, short-term borrowing rates increase by about the same amount.

The financial markets are predicting about an 80% chance the Fed’s benchmark lending rate will top out around 5% this summer – which means they’re expecting rates to go just a little bit higher.

Rates on shorter-term borrowing are unlikely to come down, but if markets are right, they probably won’t increase much more.

However, for long-term borrowing costs, as on a 30-year mortgage, rates are already coming down and are likely to fall some more – good news for homebuyers.

How about inflation – can consumers expect prices to start falling?

Overall, yes, inflation is already starting to come down – and prices on some items are even falling.

For example, used-car prices, which soared earlier in the COVID-19 pandemic, have dropped in recent months, while prices of dozens of other items, such as flour, clothes and gasoline, have eased.

However, some costs continue to increase. Egg prices soared after the supply was disrupted because of avian flu, which killed off nearly 53 million egg-laying hens. Unfortunately, increasing interest rates will not bring back those birds or help decrease the cost of eggs.

In addition, nothing the Fed does will affect the war in Ukraine, which has led to higher world wheat and energy prices.

The point being, the Fed can’t really address certain types of inflation.

Does all this mean the U.S. will avoid recession?

That’s the trillion-dollar question.

Fed officials have at times sounded hopeful that they can bring down inflation without crashing the economy – a so-called soft landing. During his press conference after the latest announcement Feb. 1, 2023, Fed Chair Jerome Powell was more cautious, saying it’s too soon to declare victory. But he noted: “We can now say for the first time that the disinflationary process has started.”

Economic forecasters have been less confident that the U.S. will avoid a recession. On average, economists surveyed this past month by The Wall Street Journal forecast a 61% probability of a recession in 2023. In addition, key economic indicators point to a recession, while the yield curve – a bond market metric that has been successful at predicting recessions – currently puts the odds at about 47%.

In my view, this all adds up to: Nobody really knows. My best advice to consumers out there is to prepare financially for a recession, but let’s not give up hope that the Fed can slow the economy without crashing it.

About the Author:

William Chittenden, Associate Professor of Finance, Texas State University

This article is republished from The Conversation under a Creative Commons license. Read the original article.