InvestMacro

By JustForex

On Thursday, the S&P 500 rose after an unexpected slowdown in the US economy, sparking optimism that the Federal Reserve will be forced to revise the pace of rate hikes downward. As the stock market closed yesterday, the Dow Jones Index (US30) increased by 1.03%, and the S&P 500 (US500) added 1.21%. Technology Index NASDAQ (US100) gained 1.08% yesterday.

According to the US Commerce Department, the economy decreased by 0.9% in the second quarter (with an estimate of +0.5%). It is the second quarter of contraction, pushing the economy into a technical recession. Analysts at Morgan Stanley note that the Fed will have to cut the pace of rate hikes to 50 bps in September, but the risks of a rate hike remain as inflation is not slowing. Other economic data showed that initial jobless claims fell by 5,000 to 256,000 for the week.

Amazon (AMZN) stock jumped more than 10% in extended trading Thursday after the report was released. The tech giant missed earnings expectations, but revenue for the quarter was up 7% from a year ago. On Thursday, shares of Intel (INTC) fell more than 8% after the report was released. Experts saw a deterioration in their Q3 outlook. Shares of Roku (ROKU) fell by 26% due to a weak report and a poor Q3 outlook. Shares of Apple (AAPL) added 3% after Q2 earnings beat estimates.

Exxon Mobil (XOM), Procter&Gamble (PG), Chevron (CVX), AbbVie (ABBV), AstraZeneca ADR (AZN), Colgate-Palmolive (CL), and others report today.

Yesterday, equity markets in Europe were mostly up. German DAX (DE30) gained 0.88%, French CAC 40 (FR 40) jumped by 1.30%, Spanish IBEX 35 (ES35) fell by 0.49%, British FTSE 100 (UK100) closed on the plus side 0.04%.

Europe’s largest oil companies Shell and Total Energies extended their share buybacks. It happened after second-quarter earnings surpassed the previous quarter’s already recorded high on the back of a surge in oil, gas, and petroleum product prices.

Preliminary data on inflation in Germany showed a 0.9% increase in consumer prices over the past month. Thus, annual inflation in Germany is estimated at 7.6%. The main reason for the price increase is the jump in energy prices after Russia invades Ukraine.

Oil is stable as the market weighs limited supply amid fears of a recession. Investors’ attention has now shifted to the next OPEC meeting next week.

Gold and silver prices have risen over the past few days amid a decline in the US Dollar Index and US government bond yields. But it should be noted that the decline of the dollar is temporary. The US Federal Reserve needs to reduce the pace of interest rate hikes to prevent sending the US economy into recession. But the rate hikes and the Fed’s balance sheet cuts continue, which is negative for the precious metals.

Asian stocks were mostly up yesterday. Japan’s Nikkei 225 (JP225) gained 0.36%, Hong Kong’s Hang Seng (HK50) decreased 0.23% and Australia’s S&P/ASX 200 (AU200) was up 0.97% on the day.

The latest economic data showed that Japan’s core Tokyo Consumer Price Index rose from 2.1% to 2.3% annually. The unemployment rate remained at 2.6%. Retail sales for June increased by 1.5%, while the Industrial Production Index added 8.9% last month, while a 7.5% decline was expected.

China will step up efforts to stabilize foreign trade in the second half of the year, the Commerce Ministry said on Friday.

S&P 500 (F) (US500) 4,072.39 +48.78 (+1.21%)

Dow Jones (US30) 32,529.63 +332.04 (+1.03%)

DAX (DE40) 13,282.11 +115.73 (+0.88%)

FTSE 100 (UK100) 7,345.25 −2.98 (−0.041%)

USD Index 106.25 −0.20 (−0.19%)

• – Japan Tokyo Core CPI (m/m) at 02:30 (GMT+3);
• – Japan Industrial Production (m/m) at 02:30 (GMT+3);
• – Japan Unemployment Rate (m/m) at 02:30 (GMT+3);
• – Japan Retail Sales (m/m) at 02:50 (GMT+3);
• – Eurozone French GDP (q/q) at 08:30 (GMT+3);
• – Switzerland Retail Sales (m/m) at 09:30 (GMT+3);
• – Eurozone French Consumer Price Index (m/m) at 09:45 (GMT+3);
• – Eurozone Spanish GDP (q/q) at 10:00 (GMT+3);
• – Eurozone Spanish Consumer Price Index (m/m) at 10:00 (GMT+3);
• – Eurozone German Unemployment Rate (m/m) at 10:55 (GMT+3);
• – Eurozone German GDP (q/q) at 11:00 (GMT+3);
• – Eurozone Italian Consumer Price Index (m/m) at 12:00 (GMT+3);
• – Eurozone GDP (q/q) at 12:00 (GMT+3);
• – Eurozone Consumer Price Index (m/m) at 12:00 (GMT+3);
• – Canada GDP (m/m) at 15:30 (GMT+3);
• – US PCE Price index (m/m) at 15:30 (GMT+3);
• – US Chicago PMI (m/m) at 16:45 (GMT+3);
• – US Michigan Consumer Sentiment (m/m) at 17:00 (GMT+3).

By JustForex

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 Arabinda Basistha, West Virginia University 

The U.S. Federal Reserve hiked its benchmark interest rate by a further three-quarters of a percentage point on July 27, 2022.

The jump was expected by most economists, although some had thought the central bank would go further in its attempts to put the brakes on soaring inflation and impose a full point increase.

The Conversation asked Arabinda Basistha, an economist at West Virginia University, to cast an eye over the Fed’s announcement and provide three key takeaways about what it tells us about the economy and future monetary policy.

1. More hawkish on monetary policy

On the surface, the headline decision to raise the interest rate by three-quarters of a percentage point is very much in line with what was expected. But a careful reading of the accompanying statement by the rate-setting Federal Open Market Committee (FOMC) reveals a slightly more hawkish Fed – one that’s more willing to act more aggressively in attempting to calm inflation – than in the last such meeting in June, when it likewise raised rates by three-quarters of a percentage point.

On that occasion, the vote was not unanimous – Kansas City Fed President Esther George opted to go for a half-point raise but was outvoted by colleagues who wanted the more aggressive 0.75% hike in a bid to bring down inflation.

But this time the vote was unanimously in favor of the three-quarter point rise, an indication that the Fed thinks it needs to act more decisively in the face of stubborn cost of living increases.

A notable change in the FOMC statement was the removal of any reference to supply chain disruptions due to COVID-19 in China. That line was in June’s statement, so its absence this time may indicate an easing of the supply chain issues that have contributed to inflation hitting a 40-year high.

That aside, Fed Chairman Jerome Powell stuck a downbeat note on inflation in the U.S., acknowledging in a news conference accompanying the announcement that June’s Consumer Price Index hitting 9.1% was “worse than expected.”

2. Expect a further rate hike in September

There is now a clear indication that that the FOMC will impose another rate hike when it meets in September. Powell noted in the news conference that another 0.75 percentage point rise in September “could be appropriate.”

At the same time, he acknowledged that with the latest increase, the Fed’s rate was pretty much in line with what economists call the “neutral” rate of interest – that is, a rate which neither stimulates the economy nor slows it down. The “neutral rate” is assumed to be around 2.5%; the latest FOMC hike puts the Feds’ policy rate up to a range of 2.25% to 2.5%.

So if there were to be another fairly sharp rise in the benchmark interest rate in September, it would push the Fed rate above the neutral rate – a move that would restrict economic growth. Again, this is an indication that the Fed is striking a more hawkish tone on monetary policy.

Powell did mention that a more moderate rate rise in September is possible, but that will likely depend on there being clear data showing price stabilization and an overall softening of the labor market. The job market has been strong for a while, with healthy monthly gains. The Fed will be looking for a decrease in the current high number of job vacancies, along with lower wage inflation, to signal a softening labor market before it can ease back on aggressive rate hikes.

3. Economic output is slowing, but no recession (yet)

In the statement accompanying the FOMC rate decision, the Fed noted that recent data showed “spending and production have softened.” Powell expanded on that a little, noting that business fixed investment – that is, how much companies spend on things like machines or factories – had gone down.

This acknowledgment that expenditure is softening wasn’t in June’s statement and is a clear sign that Fed officials believe the economy is slowing down, something Powell acknowledged. Yet at the same time, the Fed chair said the strength of the labor market indicated robust overall demand.

As such, it would seem Powell does not see the U.S. heading into recession, but rather, there will be some slowing down of the economy throughout the second half of this year.

About the Author:

Arabinda Basistha, Associate Professor of Economics, West Virginia University

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

By JustForex

The US Federal Reserve yesterday raised interest rates by 75 basis points and confirmed that further increases would be appropriate to contain high inflation, which is putting pressure on global economic activity. The Fed said that some parts of the economy, such as spending and production, have weakened. However, there has been significant job growth in recent months, and the unemployment rate remains low. At a press conference following the monetary policy announcement, Fed Chairman Jerome Powell supported the idea that the central bank would hold another rate hike in September. However, he said that a slower pace of increases might be needed to give the Fed time to evaluate the implications. It is positive for the market, as the peak of the Fed’s hawkish mood has passed. As the stock market closed yesterday, the Dow Jones Index (US30) increased by 1.37%, and the S&P 500 Index (US500) added 2.62%. Technology Index NASDAQ (US100) jumped by 4.06% yesterday.

Experts believe the Fed’s policy measures to rein in inflation seem to be having the desired effect as recent data and quarterly reports from consumer demand-sensitive sectors, including retail, have revealed fears of slowing economic growth. But many fear that in its fight against inflation, the Fed could slow the economy too much, avoid a so-called “soft landing,” and tilt the economy into recession.

Microsoft shares increased by 6.7% after forecasting double revenue growth. Alphabet shares jumped by 7.7% on the report. The company reported better-than-expected sales of Google Ads Search, easing fears of a slowing advertising market. Companies reporting today include Apple (AAPL), Amazon.com (AMZN), Mastercard (MA), Pfizer (PFE), Merck&Co (MRK), Shell ADR (SHEL), Intel (INTC), Baidu (BIDU) and others.

Most Gulf central banks raised their key interest rates by three-quarters of a percentage point Wednesday, following the US Federal Reserve, as their currencies are pegged to the dollar. The Central Bank of Kuwait, the only one of the six Gulf Cooperation Council (GCC) countries that peg its currency to a basket, not just the dollar, raised its key discount rate by 25 basis points to 2.5%.

Equity markets in Europe closed yesterday in green territory. German DAX (DE30) gained 0.53% on Wednesday, French CAC 40 (FR 40) jumped by 0.75%, Spanish IBEX 35 (ES35) added 0.68%, British FTSE 100 (UK100) closed in plus 0.57%.

Rising inflation and concerns over low natural gas supply combined with the risk of recession caused consumer sentiment in the euro area to plummet to record lows. The main reasons for the sharp deterioration in confidence are primarily related to the Russian invasion of Ukraine. Firstly, because of fears of low natural gas supply. Secondly, fears of recession, as the war has triggered inflation, especially in energy and commodities. In addition, investors are concerned about the political uncertainty in Italy and the struggle for the position of Prime Minister in the UK.

Oil rose more than $2 on Wednesday as a report of lower US inventories, and reduced Russian gas supplies to Europe offset fears of lower demand and a US interest rate hike. US crude reserves were down by 4.5 million barrels last week as exports rose to a record high due to a significant discount in US crude against the international benchmark Brent, the Energy Information Administration said.

The gas market also remains tight. Just days after Europeans breathed a sigh of relief when Russia’s Gazprom announced it would resume supplies through its Nord Stream 1 pipeline, it announced Monday that flows would be cut again. The announcement, in which Gazprom said it would repair a turbine along the pipeline, was met with disbelief and condemnation in Europe. The move will reduce gas flows to Germany by up to 20% of its capacity. Germany, the region’s largest economy and a traditional growth driver, has particular cause for concern. Germany is heavily dependent on Russian gas and is sliding into recession. Since Russia is under a slew of international sanctions in response to its war with Ukraine, gas is one of the weapons Russia uses against Europe. As a result, natural gas prices continue to rise significantly. Analysts predict a harsh winter for Europe if the situation does not change.

On Thursday, Asian stocks showed cautious gains as investors sensed a possible slowdown in the pace of rate hikes in the United States. Japan’s Nikkei 225 (JP225) gained 0.22%, Hong Kong’s Hang Seng (HK50) decreased by 1.13%, while Australia’s S&P/ASX 200 (AU200) was up 0.23% on the day.

S&P 500 (F) (US500) 4,023.61 +102.56 (+2.62%)

Dow Jones (US30) 32,197.59 +436.05 (+1.37%)

DAX (DE40) 13,166.38 +69.45 (+0.53%)

FTSE 100 (UK100) 7,348.23 +41.95 (+0.57%)

USD Index 107.22 +0.73 (+0.69%)

• – Australia Retail Sales (m/m) at 04:30 (GMT+3);
• – US GDP (q/q) at 15:30 (GMT+3);
• – US Treasury Sec Yellen Speaks at 15:30 (GMT+3);
• – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
• – US Natural Gas Storage (w/w) at 17:30 (GMT+3).

By JustForex

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.