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25 July 2022
- Last week, the European Central Bank surprised the markets by raising interest rates by 0.5%. At the same time, it introduced the so-called Transmission Protection Instrument, which main aim is to limit the rise in yields on bonds of selected countries, which was worrying central bankers and economists. Thus, the hawks thus saw higher rates, but at the same time, we learned that the situation in Italy is still deteriorating due to the political crisis in the country, so the threat of a recession remains.
- This news flow suggests that the ECB may be forced to show whether it can walk the walk and prevent a deepening crisis from developing in the region in the coming months. “In view of recession risks, Italy’s collapsed government and a very strong USD, the ECB has a lot of cards stacked against it,” said analysts at Rabobank.
- The European Central Bank’s President Christine Lagarde said that the ECB would raise rates as long as necessary to bring inflation down to 2%. In any case, the ECB will approach rate hikes after assessing the current situation. According to the ECB’s hawk Robert Holzmann, there may be another 0.5% hike at the next meeting, but it could be less.
Indices
Despite Friday’s sell-off, the stock had a good week after last week’s loss. Stocks made most of their gains on Tuesday, and, interestingly, the gains were helped mainly by signs of a slowing economy and weakening inflationary pressures. At the same time, the markets showed signs of being oversold and changed in sentiment as the negative sentiment peaked. Technology titles and the Consumer Discretionary sector thrived thanks to the good news from Amazon and Tesla, while the Health Care and Utilities sectors lost the most.
A strong Tuesday also helped the stocks in Europe to achieve weekly gains, even though the poor macro data did not deter the ECB from its first interest rate hike in 11 years. As a result, the European STOXX Europe 600 Index ended the week 2.88% higher, Germany’s DAX 40 rose by 3.02%, France’s CAC 40 increased by 3.00%, and the UK’s FTSE 100 rose by 1.64%.
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US30 +1.95% |
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US100 +3.45% |
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US500 +2.55% |
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GER40 +3.02% |
Commodities
The surprise 0.5% ECB rate hike (0.25% hike was expected), unfavourable macro data and a bad situation in the Chinese real estate market did not play in favour of commodities, but the weakening of the US dollar eventually led to a positive week for the commodity markets. However, if the Fed stays with its current aggressive pace of rate hikes (which is widely expected), the commodity prices might get affected. Only the limited supply of most industrial commodities will then play in favour of commodities and limit price declines.
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Gold +1.15% |
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Silver -0.54% |
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BRENT +2.02% |
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NATGAS +18.29% |
Forex
Although the Fed’s and the BoJ’s monetary policies are opposed, the US dollar’s retreat from its long-term highs has strengthened the Japanese yen. Japan’s inflation may hold above two percent, but some hawkish comments and actions from the BoJ are not expected. The central bank is likely to continue on its dovish course, and we can expect the Japanese yen to weaken again following a more significant rate hike by the Fed.
The euro has had a wonderful week, although it made its most significant gains before the ECB rate hike. In addition to the rate hike and the new tool to lower bond yields in peripheral nations, news of renewed gas supplies to Europe also helped the euro.
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EUR/USD 1.49% |
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USD/JPY -1.72% |
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GBP/USD +1.21% |
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USD/CAD -0.89% |
Macro
The macro data did not please investors much last week. PMI data from Germany and the Euro Area fell below the 50-point level, pointing to the first contraction in factory activity since June of 2020. In the services activity, we saw the first contraction in seven months. The PMI data in the US were similar, and only the UK data surprised positively.
Weekly jobless claims came in above expectations and hit their highest level (251,000) in nine months, and the housing market data also failed to meet the market expectations, ending below the market expectations.
What to watch out for this week
- The main topic of the upcoming weekend will be the FOMC meeting, which is expected to see another 75bp rate hike. However, an increase of up to 100 bps is still in play, but the probability is still relatively low. Perhaps even more influential on the markets than the rate hike itself will be the FOMC statement and the Fed Chair Powell’s press conference, given the ongoing recession risk and the Fed’s willingness to fight inflation at any cost.
- GDP news will also be interesting. The first preliminary figure will come on Thursday from the US, where moderate growth is expected for the second quarter, which would not fulfil the looming recession that two consecutive quarters of negative GDP growth would imply. Then on Friday, preliminary economic growth data will be released by most major European economies and the Eurozone itself, where QoQ growth of 0.6% is expected.
- Consumer price growth for July will also move the markets. Germany will be the first to report on Thursday, followed by other European countries on Friday and again the Euro Area with preliminary data. In Germany, year-on-year growth is expected to slow to 7.3%, from 7.6% in June, while for July, price growth is expected to accelerate from 0.1% to 0.6%. In the Euro Area, the YoY growth is expected to accelerate to 8.7%, from 8.6%, while month-on-month growth is likely to slow from 0.8% to 0.2%.
- On Friday, we will also see the data on Personal Consumption Expenditures, one of the leading inflation indicators that the Fed uses to make rate decisions. The Core PCE price index is expected to rise to 0.5% month-over-month, from 0.3% in June.
- Before the interest rate decision, the housing market, consumer confidence and durable goods orders numbers will still be released on Tuesday and Wednesday.
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