Federal Reserve Delivers on 75 Basis Point Rate Rise despite Q2 Contraction

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01/08/2022
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Federal Reserve Delivers on 75 basis point (bp) Rate Rise despite Q2 Contraction

The first estimate of Gross Domestic Product (GDP) indicated the US economy contracted at a -0.9% annualised rate in the second quarter. This puts the US economy into recession as it’s a second consecutive quarterly contraction following a Q1 fall of -1.6%. One highlight from the data was that prices were shown to have only risen 4.4%, declining from the 5.2% pace set in Q1, giving some support to the suggestion that inflation may be peaking.  In further data, sales of new homes fell -8.1% in June and now sit at their lowest levels since the early months of the pandemic. Rising mortgage rates and inflation are creating growing hurdles for new homeowners. This week, the Mortgage Bankers Association reported that the number of weekly mortgage applications fell to its lowest level since 2000. [1]

Wednesday’s 75 basis point US interest rate increase may have been widely expected, but investors will have found Federal Reserve Chair Jerome Powell’s comments interesting as he referred to levels broadly in line with our estimates of neutral interest rates and will be much more data-dependent going forward. The S&P 500 rallied some +4.3% this week as growth stocks took reassurance from the Fed that rates may only rise gradually from here, and some better-than-expected Q2 earnings figures from some of the index’s bigger Technology constituents.

Elsewhere, the UK’s FTSE 100 closed the week +2.0% higher and the MSCI Europe ex UK index returned +2.4%.  Continuing energy shortages given Germany’s reliance on Russian energy supplies is still weighing on sentiment on the continent. Russia’s natural gas supplier Gazprom resumed shipments via the Nord Stream 1 pipeline last week following maintenance, but capacities are well below typical levels. In an effort to avoid shortfalls, the European Union has now agreed to target 15% cuts in gas demand.

MSCI AC Asia ex Japan drifted -0.6% lower over the course of last week as Chinese stocks in particular traded lower on Friday. Technology and Property stocks were hit as a lack of fresh stimulus was inferred from Chinese policy makers last week.

In commodities, the price of a barrel of West Texas Intermediate crude oil traded over $100 intra-day on Friday, having closed at $95 a week earlier. [2]

The Week Ahead

UK investors will await the Bank of England’s policy meeting on Thursday, with the committee seemingly weighing up a 50 basis point increase to interest rates. The Central Bank has so far stuck to quarter point moves but last month’s inflation data led Chair Andrew Bailey to confirm that a larger move was now on the table.

New Purchasing Managers Index (PMI) data, a gauge of business activity levels within the Manufacturing and Services sectors, is also published this week across the major developed economies. Chinese manufacturing has already shown an unexpected contraction with data released over the weekend, but arguably the highlight is the US Services reading from the Institute for Supply Management which is due on Wednesday, with a modestly slower rate of growth expected.

Also in the US this week, the first Friday of a new month brings an updated Labour Report and non-farm payroll survey, with any surprises likely to be market moving given the resilience of labour markets this year in the face of growing economic headwinds. [3]

 

[1] Bureau of Economic Analysis, 01/08/22

[2] Refinitiv, 01/08/22

[3] Forex Factory, 01/08/22

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