A notable change this week was the tone of the Fed on interest rate hikes. Over the past few months, we have all become accustomed to the hawkish tone of the Fed and its message that interest rates will be hiked as much, and as quickly, as needed to fight inflation. This, despite the potential negative effect it will have on economic growth. On Wednesday, the Fed proceeded to hike interest rates by 75 basis points, which was expected, however, the Bank shifted its tone to a less hawkish one. While Fed Chair, Jerome Powell, acknowledged the slowdown in economic activity, saying that it will likely “become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” he highlighted the fact that the US economy is still performing extremely well in areas such as employment. Powell also noted that, “preliminary gross domestic product numbers should generally be taken with a ‘grain of salt’,” emphasising that preliminary numbers are due to be adjusted quite significantly.
While markets certainly paid attention to the less hawkish stance, and risk sentiment is improving, the real shift in risk appetite will depend on an actual decrease in inflation, which we are yet to see. Another noteworthy change in the statement from the Fed, was that it made no mention of COVID-19, which is the first statement since 2020 to not make reference to the virus and the impact it has had on the economy.
DATA IN A NUTSHELL
Preliminary European Union (EU) data showed consumer prices in Germany, Europe’s largest economy, advanced 0.8% from a month earlier in July, compared to market expectations of a smaller 0.4% increase. Early Purchasing Managers Index (PMI) surveys indicated that the eurozone economy is set to contract in July, while the Ifo Business Climate Index for Germany showed the country is on the cusp of a recession. The economic sentiment indicator (ESI) in the euro area declined for a fifth consecutive month to 99 in July, its lowest level since February last year, down from 103.5 in June, and below market forecasts of 102. Sentiment deteriorated across all sectors, as the war in Ukraine and the energy crisis continue to impact economies, and interest rates and inflation keep growing.
Meanwhile, in the United Kingdom (UK), the latest PMI data showed the British economy fared much better than the euro area in July and retail sales in June decreased less than expected. UK car production increased 5.6% year-on-year in June, rising for the second consecutive month, amid signs that supply chain shortages are beginning to ease, although output remains 33.2% below 2019 levels.
The American economy contracted by an annualised 0.9% quarter-on-quarter in the second quarter, following a 1.6% drop in the first quarter, and is technically entering a recession, the advance estimate showed. Most investors were expecting 0.5% growth although some were betting on a negative reading. Inventories and business investment were the main contributors to the downward drag. Inventories declined mostly at general merchandise stores as well as motor vehicle dealers. Residential investment fell 14%. At the same time, personal consumption expenditures slowed and only grew 1%, with spending on goods falling 4.4% and government consumption dipping by 1.9%, partially reflecting the sale of crude oil from the Strategic Petroleum Reserve. On the other hand, net trade made a positive contribution for the first time in two years, as US exports jumped 18%, led by industrial supplies.
New orders in June for US-made durable goods rose 1.9% from a month earlier, their highest increase since January and the fourth consecutive monthly increase. Figures beat market forecasts for a 0.5% decrease, indicating that business spending plans remain strong despite higher interest rates and inflation.
ALL EYES ON EARNINGS
US stock futures tracked the broader market, to trade mostly sideways on Thursday, as investors reassessed the outlook for tightening monetary policy against additional preliminary evidence that the world’s largest economy is falling into a recession. Turning to the corporate side, social networking company, Meta Platforms, shed more than 4% in premarket trading due to disappointing quarterly results. Virtual healthcare company, Teladoc Health, plummeted over 25% after taking another large impairment charge. On the flip side, car manufacturer, Ford, gained 5% after positively surprising investors.
The UK’s FTSE 100 traded marginally softer after a good start on Thursday, as investors digested mixed earnings and the relief provided by the Fed’s monetary policy decision faded. Barclays’ share price fell more than 4% after posting a 48% year-on-year slump in second quarter net income, citing costly trading errors in the US, while trading platform, CMC Markets, plunged 20% after warning of higher costs. On the positive side, petrochemical giant, Shell, climbed almost 2% after posting an all-time high profit of $11.5 billion in the second quarter and extended its share buyback program, as refining profits tripled and gas trading remained strong. Spirits group, Diageo, was also up nearly 2% after reporting a 24% jump in full-year sales.
Europe’s major stock indices were mixed on Thursday afternoon, with the DAX trading 0.2% softer and the STOXX 600 gaining 0.6%, as investors digested a slew of earnings and economic data, while interest rate woes faded. On the corporate side, Santander Bank’s second quarter profits missed the mark amid a 50% surge in net loan loss provisions and downside pressures from Brazil. Aircraft manufacturer, Airbus, also fell into the red after cutting delivery targets citing supply issues. Meanwhile, multinational food and beverage company, Nestle, improved its sales outlook but warned about potential profitability issues.
Japan’s Nikkei 225 Index rose 0.36% while the broader TOPIX Index edged up 0.16% on Thursday, with both benchmarks paring back most of their post-Fed gains from earlier in the session, as investors remained cautious about the domestic corporate outlook. Strong gains were seen from chemical company, Shin-Etsu Chemical, which was up 4.2%, vehicle manufacturer, Mitsubishi Motor, which gained 10.9% and medical information services, M3 Inc, up 13.9% on upbeat earnings reports.
GOLD’S GAINS SHORT-LIVED
Brent Crude Futures climbed toward $108 per barrel on Thursday after rallying 2.1% in the previous session, as US crude inventories dipped after risk sentiment improved with the Federal Reserve policy announcement. International Energy Agency data released on Wednesday indicated that US crude stockpiles fell by 4.52 million barrels last week, while exports rose to a record 4.55 million barrels a day. US gasoline demand also increased 8.5% week-on-week, with inventories declining by 3.3 million barrels. Oil prices also received an added boost on the back of a less hawkish Fed. Commodity markets have been concerned that aggressive rate hikes would lead to demand destruction but persistent supply-side issues and various disruptions have kept the global market tight and energy prices elevated.
Gold rose to just above $1,750 per ounce on Thursday, extending last session’s rebound after second quarter GDP data showed a contraction in the US economy. Bullion prices were assisted by Fed Chair, Jerome Powell, stating that it will likely become appropriate to slow the pace of interest rate increases, depending on the inflationary and economic picture. These less hawkish remarks weighed on the dollar and Treasury yields while supporting gold prices. Meanwhile, the World Gold Council (WGC) lowered its outlook for physical gold demand in the second half of 2022, citing slowing growth in the biggest markets, as China and India both face economic headwinds. The WGC also warned of weakening investment demand due to aggressive global monetary tightening.
US natural gas futures corrected to around $8.50/MMBtu (one million British Thermal Units) as investors unwound some long positions, following an aggressive rally that pushed prices to record levels of $9.70/MMBtu earlier this week. However, even with the recent correction, prices have more than doubled in value in July, putting it on track for one of the best monthly performances on record, with higher domestic and international demand being the primary driver.
DOLLAR NEAR ONE-MONTH LOWS
The US Dollar Index dipped to 106.5 on Thursday, inching closer to its lowest levels in almost a month, on the back of the less hawkish Fed. Investors then turned their attention to US GDP data which revealed that there was, in fact, a contraction of the US economy, of 0.9% in the second quarter of this year, which put further pressure on the dollar.
The euro remained on shaky ground, trading around $1.012, moving toward the $1 parity hit earlier in the month as lingering recession concerns, exacerbated by the ongoing energy crisis in Europe, weighed on investors’ moods, while inflation in the economic zone showed no signs of peaking.
The Pound hovered around $1.20, just above the two-year low of $1.176 hit mid-July, as investors braced for aggressive tightening from the Bank of England (BoE) in response to the highest inflation rate in four decades. BoE governor, Andrew Bailey, opened the door for a 50 basis point hike in August, which would be the largest since 1995, saying that the bank remains fully committed to bringing inflation down to the central bank’s target of 2%.
The pound started the day trading at 1.2171/$ and 1.1937/€.
Written by Citadel Global Director, Bianca Botes
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