Markets are gearing up for this week’s FOMC meeting, where a 75-basis point is the most likely outcome, and as Fed members believe the neutral rate is around 2.25 %- 2.50% this means borrowing costs in the US are on their way to a restrictive territory and that could lead the economy to a recession.
Most US major indices rallied last week between 2%-3% as investors were considering that the stock market has bottomed since the market has already priced in at a 3.5% rate by the end of the year.
The WTI crude oil has retreated last week by 2.5% while the Brent crude rallied by 3% ie, the spread between both has increased to $8 due to the high probability of US economic recession would lead to lower demand on one hand and the increase in the US oil inventories last week on the other.
Economic data highlights
Monday 25 of July
Tuesday 26 of July
- German Ifo Business Expectations (Jul)
Wednesday 27 of July
- US New Home Sales (Jun)
- AUD CPI (Q2)
Thursday 28 of July
- US Durable Goods Orders (Jun)
- US Oil Inventories
- Fed interest Rate Decision and Press Conference
- AUD Retail Sales (Jun)
Friday 29 of July
- US GDP (Q2)
- JPY CPI (Jul)
- Australian PPI (Q2)
- CHF Retail Sales (Jun)
- German Unemployment (Jul)
- EU CPI (Jul)
- EU GDP (Q2)
- US PCE (Jun)
- CAD JDP
Many in the markets have been talking about a 100-basis points rate hike based on the June 9.1% inflation print. However, investors went with the 75PB scenario after most hawkish members in the FOMC committee indicated they were not convinced of the need for a 100bp move. Therefore, the FED most likely would increase rates by 75bp this meeting, 50 bp in September, 25bp in November and 25bp in Dec.
The US economy contracted by 1.6% in Q1 due to the supply chain disruption caused by the spread of the Coronavirus which led to lockdowns including main ports in China. The US PMI with consumer confidence data has fallen significantly since April due to the rise in the cost of living and higher interest rates leading to a weak growth forecast in (Q2) of 0.4%. Having said that, a negative print by the end of Q2 will mean that the US economy is in a technical recession which is two consecutive quarters of negative GDP.
EU Inflation and GDP
EZ Primary CPI numbers for July are expected to rise from 8.6% to 8.7%. Any print above that increases expectations of another 50bp hike from the ECB. Eyes will be also on the GDP numbers in (Q2) which are projected to grow by 3.4% down from 5.4% in the first quarter. The EZ PMI and consumer confidence do not look any better than in the US as the data has been in a downtrend since April add to that, the current energy crisis with Russia could lead to hard decisions from the European side and may drive the economy to a recession in the mid-term.
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