A key week for markets this week with the interest decision of the Federal Reserve.
Last week saw a modest risk-on move in the markets with equities rallying and the US Dollar backing away from 20 year highs.
Review of last week’s key action
FTSE +117 +1.64% DOW +611 +1.95% S&P +98 +2.55% NASDQ +381 +3.33% DAX +388 +3.02% NIKKEI +1,126 +4.2% Hang Seng +322 +1.53%
The ECB attempted to enhance its reputation by raising rates by 0.5% to zero. Sounds impressive but the gulf between the Refi rate and inflation is sizeable. In addition to raising rates the ECB has given us another acronym – the TPI. The Transmission Protection Instrument is designed to prevent a divergence in spreads between member bond yields. The most obvious example being Greece and Italy over the past month, which has seen the yield of the Italian 10-year bond widen to 2.5% against the German 10-year bond. The instrument will work by being deployed when the ECB decides that the market has become disorderly and self-fulfilling. With the tortuous resignation of Mario Draghi, the caretaker Prime Minister in Italy, the TPI might be deployed sooner than later. Italian bond spreads jumped to 2.33% on confirmation of the resignation.
Aside from the ECB, markets generally had a better week last week as interest rate expectations were pared back in the face of weakening economic activity and expectation that inflation may not rise as much with energy and base metals all sliding. The week however, ended on a sour note with manufacturing and services data disappointing. Services PMI data across much of the Eurozone and the US fell sharply, below the 50 level which indicates a contraction in the services sector. The standout was the UK Services PMI data which recorded a modest increase to 53.3. The Global Composite Purchasing manager’s report from Standard and Poor’s posted a reading of 47.5 in July, sharply lower than the 52.3 reading in June and the worst since June 2020.
EURUSD +1.28 +1.26% GBPUSD +1.68 +1.41% USDJPY -2.42 -1.74%.
Whilst the attention was focussed on the ECB and their decision to raise rates by 0.5%, the US Dollar gave up some ground, having touched a 20-year high the previous week. The focus switches right back on the US Dollar this week with the decision from the FOMC due this Wednesday.
Gold +20 +1.17% UK OIL +2.58 +2.55% US OIL -2.59 -2.65% Bitcoin +1,803 +8.6%
Gold responded to the weaker US Dollar to climb for the first time in 5 weeks. Since its peak in early March, Gold has fallen $352 or 17%. Oil is reacting more to mounting evidence of a global economic slowdown than the war in Ukraine. The difference between UK Oil and US Oil was noticeable as WTI (UK Oil) came under more pressure from the perceived slow down and the expected rate rise this week from the Fed dampening activity even further.
Data / events for the week ahead
Wednesday will see another FOMC meeting where the US central bank, the Fed, is going to raise rates and where speculation has ebbed and flowed as to the size of this hike.
Monday:
Germany - Business IFO Business Climate. Large survey of manufacturers, builders, wholesalers, services, and retailers. Climate is definitely getting cooler. Last week’s German PMI data points the way.
Tuesday:
US - Conference Board Consumer Confidence index.
Wednesday:
US - Core Durable goods. Slower… But the main event is later.
US - FOMC rate decision and statement followed by Press Conference. Market expects 0.75% hike. Immediately after the CPI release two weeks ago, the market was pricing a full 1% hike but that now seems less likely. Data on inflation expectations fell to their lowest level since April 2021 which will probably tip the balance in favour of the 0.75% hike. Global equities, Bonds and the US Dollar all very sensitive to this release.
Thursday:
US - Q2 GDP reading. The first reading which is often liable to adjustment. Expect a contraction of 0.8% with a range from 0.3% to 1.6%. the is a lagged indicator and less important to the market.
Friday:
Eurozone - CPI Flash estimate – Consensus is for a reading of 8.7% but could be higher. Both US and UK readings were.
