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22 August 2022
- On Wednesday, the Fed released the minutes from its latest policy meeting. Investors’ expectations were rather mixed, but judging by Wednesday’s action in the stock markets, the news ended up being received rather positively.
- The main message was that policymakers perceived the slowing economy as a major risk and further tightening of monetary policy “would have a larger negative effect on economic activity than anticipated”. Other risks then include geopolitical developments or more pandemic-related disruptions, which in short will have a negative effect on the economy. Investors took this part as evidence that the Fed needs to rethink its aggressive approach to interest rates, and as a result, stocks gained on Wednesday.
- On the other hand, policymakers still see the risk in high inflation, which is likely to remain at high levels for some time. According to some views at the Fed, this means that real rates are still below neutral, which in turn raises questions about the continuation of the set trend and another 0.75% rate hike at the central bank’s next meeting.
Indices
US stock markets ended in the red last week. The release of the Fed Minutes on Wednesday did bring a slight boost to the markets, but comments by St. Louis Fed President James Bullard from Thursday, who said we may not have seen the peak in inflation yet, cooled investors down and stocks lost significantly on Friday.
Inflation in Europe shows no signs of slowing down, leaving investors expecting further monetary tightening. As in the US, this had a negative impact on markets, with the exception of UK equities. The Pan-European STOXX Europe 600 Index ended the week 0.80% lower, Germany’s DAX 40 declined by 1.82%, France’s CAC 40 Index slipped by 0.89%, and the UK’s FTSE 100 Index added 0.66%.
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US30 -0.16% |
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US100 -2.38% |
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US500 -1.21% |
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GER40 -1.82% |
Commodities
The uncertainty that the Fed is creating among investors with its recent statements, as well as the aforementioned publication of the Fed minutes, should play in favour of precious metals, considered safe havens in times of uncertainty. Even so, we have seen prices fall in precious metals over the past week, proving that investors are not yet sufficiently convinced of the need to diversify their portfolios and put their money in safe investments.
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Gold -3.07% |
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Silver -8.42% |
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BRENT -2.30% |
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NATGAS +5.65% |
Forex
The US dollar has returned to growth over the past week as investors count on the fact that interest rate hikes to fight inflation will not end so soon. As a result, the US dollar hit a new five-week high on Friday, posting its biggest weekly gain since April 2020. The dollar index added 0.61% during the week to hit its highest level since mid-June. “For the USD to weaken meaningfully, the Fed has to get more concerned about growth than inflation, and we are not there yet,” Bank of America analyst Michalis Rousakis said in a report on Friday.
The euro is doing the complete opposite, and on Friday, it again approached parity with the dollar. “Meanwhile, we expect the European Central Bank to stop hiking next year on concerns around growth and/or spreads. EUR is also exposed to the much-worsened terms of trade and the slowdown in China,” Rousakis said.
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EUR/USD -2.13% |
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USD/JPY +2.55% |
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GBP/USD -2.54% |
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USD/CAD +1.72% |
Macro
US retail sales growth slowed in July, but still beats the estimates. Core retail sales rose by 0.4% from the previous month, while also rising by 10.02% year-on-year.
Housing market data were, on the other hand, quite disappointing as housing starts fell by 9.6% in July and existing home sales fell by 5.9%.
UK inflation hit double digits in July for the first time since 1982. The 10.1% figure was even worse than the markets expected, mainly due to higher food costs. Core inflation also beat estimates, rising to 6.2%.
Unemployment in the UK remained at 3.8% in June, while core wages rose 4.7% in Q2. However, after accounting for the inflation, wages fell 3%, the sharpest drop since 2001.
Inflation in the Eurozone rose to a new record of 8.9% in July from 8.6 in June. Food, alcohol and tobacco recorded the highest increases, with energy prices falling the least. However, the second preliminary GDP figure for the second quarter showed a decline to 3.9% from 4.0%.
What to watch out for this week
- The most anticipated events will come on Friday, when the July data on the PCE Price Index, the Fed’s preferred measure of inflation, arrives. It reached an annual rate of 6.8% in June, the highest since 1982.
- We’ll also eagerly await Fed chief Jerome Powell, who will speak at the central bank’s annual conference in Jackson Hole. Investors are expecting to find out what the Fed’s next direction and interest rates will be, and increased volatility in the markets is on the way.
- We’ll see how the US economy is doing on Thursday as the second preliminary GDP figure for the second quarter comes out. The first estimate pointed to a contraction of 0.9%.
- A slowdown is also expected in durable goods orders, and data on new home sales and pending home sales will give us a better look at how the US housing market is cooling.
- Preliminary August PMI data will arrive on Tuesday, both in Europe and the US. The Euro Area data will be significant given that in July, we saw the first drop below the 50-point mark since June 2020. Analysts are expecting a further decline due to rising energy prices.
- Also, in the UK, many eyes will be laid on the PMI data as the Bank of England expects a recession from the end of this year, and inflation is expected to hit 15% early next year, according to some economists.
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