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%.

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.

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.