Weekly market recap 01 August 2022 - FTMO®

Slide WEEKLY MARKET RECAP Your weekly global financial markets newsletter Market weekly Recap

01 August 2022

  • The Fed was once again in the spotlight of investors and economists last week, and it is safe to say that it did not disappoint. On Wednesday, the Fed raised interest rates for the second consecutive time by 0.75%, and rates in the US are now at their highest level since 2019. It reached the then 2.5% level after it started hiking at the end of 2015, and it took three years to reach the now surpassed high. But it didn’t last long, and in 2020, with the world paralysed by the spread of Covid-19 disease, the rates had to be brought back to zero.
  • This time, the Fed took a much more forceful approach to rate hikes and quantitative tightening, going from 0.25% to 2.50% in four months. And although analysts and investors had generally expected the Fed to continue the pace it had set or even accelerate its pace, the central bank chief lowered their expectations somewhat with his comments on Wednesday, as many market participants found him too dovish.
  • According to the Fed, rates are now at a neutral level, and Fed chief Jerome Powell reiterated that the US economy is probably not in a recession given the low unemployment rate and strong labour market. At the same time, however, the Fed recognises that there are two-sided risks associated with rapid rate hikes, according to Powell. The Fed does not want to slow the economy too much, but it also does not want to leave inflation high for the long term. From now on, however, the Fed does not plan to be as open with guidance as it has been recently and will not announce rate hikes in advance as it has been doing but wants to make decisions based only on the available data.

Indices

The “bad news is good news” rule has taken hold in the stock markets, so US stocks had another positive week despite the central bank raising interest rates by 0.75% on Wednesday and the US economy posting an unexpected 0.9% drop in the second quarter. Investors are certainly counting on the Fed to slow its pace of rate hikes at its subsequent meetings.

Although the week was starting with minimal volumes, stocks have been gaining since Wednesday thanks to the results of tech giants, which managed to reassure investors and help the stock indices to their best monthly result since 2020 (S&P 500 in July +9.11%, DJIA +6.73%, Nasdaq +12.55%).

European equities also thrived, helped by sentiment in the US, and investors have also stopped worrying about the possible gas shortages if Russia cuts its supplies to the EU. As a result, the Pan-European STOXX Europe 600 Index ended the week 2.96% higher, Germany’s DAX 40 rose 1.74%, France’s CAC 40 increased 3.73%, and the UK’s FTSE 100 returned 2.02%.

US30
+2.97%
US100
+4.45%
US500
+4.26%
GER40
+1.74%

Commodities

Most commodities, especially precious metals and energy commodities, were also helped by speculation that central banks might slow the pace of interest rate hikes in the near term. There was also good news that the Chinese central bank plans to help developers in China by injecting new money into the banking system.

Next week, investors will be closely watching the OPEC+ meeting to decide on production quotas for September and beyond. Most analysts expect OPEC to make no changes or a slight increase.

Gold
+2.25%
Silver
+9.31%
BRENT
+5.71%
NATGAS
+0.85%

Forex

Although the US Fed raised rates by 0.75% for the second consecutive day on Wednesday, the US dollar lost ground again during the week. This is because investors have returned to risk assets in recent weeks, and the risk of a US recession has had a harmful effect on the dollar. The dollar did strengthen after the release of the PCE Price Index, which is the leading inflation indicator for the Fed, but even that was not enough to give it a positive weekly result. However, analysts still reckon that global economic growth is still playing in the dollar’s favour in the near term, and the Fed’s comments are not dovish enough to make the dollar’s weakness long-lasting.

EUR/USD
+0.11%
USD/JPY
-2.10%
GBP/USD
+1.30%
USD/CAD
-0.94%

Macro

In addition to the Fed meeting, other important data were reported last week. US Commerce Department said on Thursday that gross domestic product (GDP) contracted by an annual rate of 0.9% in the second quarter. Consensus expectations were for an increase of 0.5%. A second consecutive quarter of contraction (the economy shrunk at a 1.6% pace in Q1), which is a definition of a “technical” recession, only strengthened investors’ belief that the Fed could slow or stop its rate hikes sooner than expected.

The personal consumption expenditure price index reported on Friday increased 6.8% year-on-year in June of 2022, the highest reading since January of 1982 and above 6.3% in the previous two months. Excluding food and energy, PCE Price Index accelerated to 4.8% from 4.7%. In MoM, PCE Price Index increased by 1%, the most significant increase since September 2005.

Preliminary data on inflation in the Euro Area show prices rising at an annual rate of 8.9% in July, following an increase of 8.6% in June. The core Inflation rate, which excludes the cost of energy, food, alcohol & tobacco, advanced to 4% from 3.7%. Compared to the previous month, consumer prices were up 0.1%.

The inflation rate in Germany edged lower for a second straight month to 7.5% in July of 2022 from 7.6% in June. However, inflation remains close to 40-year highs due to the war in Ukraine.

What to watch out for this week

  • The main report of the week will come on Friday when the nonfarm payrolls report for July will show the impact of the Fed rate hike on the labour market. Analysts expect 250,000 jobs to be created, down from 372,000 the previous month. The unemployment rate is expected to remain stagnant at an all-time low of 3.6%. A lower-than-expected figure will mean the Fed could slow its pace of interest rate hikes.
  • Data on JOLTs job openings will also clarify the labour market situation on Tuesday. Although demand for new labour has been falling in recent months, it is still expected to remain high.
  • Also important will be data on PMI in the manufacturing sector on Monday and PMI in the services sector on Wednesday (in the US, Euro Area and the UK), which may indicate the state of the US, UK and Euro Area economies.
  • Investors will get a chance to hear from several Fed officials this week, including Chicago Fed President Charles Evans, St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester. Their comments will be watched for any indications that a smaller rate hike may be on the cards in September after recent data pointing to economic weakness.
  • Thursday’s rate decision will be made by the Bank of England, which is widely expected to move to a more aggressive 0.5% hike after five 0.25% hikes. Inflation is at a 40-year high of 9.4% and could rise to 12% by October.
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