Fed signals a less hawkish stance

written on July 28, 2022

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

All three major US equity indices rallied on Wednesday after Fed Chair Jerome Powell highlighted that the central bank could eventually moderate the magnitude of rate hikes when it would become clear that the inflation peaked or in case of a dramatic economic slowdown. The Dow closed 1.37% higher, the S&P 500 rallied 2.62% and Nasdaq soared 4.06%. All S&P sectors finished higher, led by communication services, technology and consumer discretionary stocks. Investors now await Q2 GDP due later today for clues on the state of the US economy, as well as more earning reports from major tech firms. Elsewhere, European equity markets also edged up yesterday, with the benchmark Euro Stoxx 50 rising 0.91% as upbeat earnings reports fuelled sentiment. 

Summary

  • Major equity markets in Asia were higher this morning, with the exception of Hong Kong which slipped by around 0.56% following a rate hike by the country’s central bank. Australia and South Korea led the gains, with the ASX 200 and the Kospi both advancing by around 0.80%. 
  • European shares are on track to follow global peers higher while US markets are seen taking a breather after yesterday’s rally. 
  • Oil prices edged up on Thursday, extending gains from the previous session, buoyed by lower crude inventories and higher gasoline demand in the United States. 
  • The Federal Reserve raised the target range for the fed funds rate by 75bps to 2.25%-2.5% as widely expected, the fourth consecutive rate hike, pushing borrowing costs to the highest since 2019. In the conference that followed the decision, Fed Chair Jerome Powell stepped away from the specific guidance he gave at the June meeting, though he didn’t take another similar-sized move off the table. Investors are betting rates will peak around 3.3% this year before the Fed starts cutting modestly in 2023. 
  • New orders for US-made capital goods rose 1.9% from a month earlier in June, the most since January and the fourth consecutive monthly increase. Figures beat market forecasts for a 0.5% decrease in a sign that business spending plans remain strong so far despite higher interest rates and inflation. 
  • Shares of Meta Platforms fell over 3% in extended trade on Wednesday after the Facebook owner posted its first-ever quarterly drop in revenue and issued a gloomy forecast, echoing a warning last week from ad tech rival Snap. 
  • Schneider Electric this morning upgraded its revenue and earnings targets for 2022 after a strong performance in the first half of the year. 
  • Airbus on Wednesday said net profit for the second quarter more than halved and that it now expects to deliver fewer planes this year than previously targeted. The company has been struggling to ramp up its production rate fast enough to meet ambitious delivery targets amid continued supply-chain issues. 

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Life’s full of mysteries. Your money shouldn’t be one of them.