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Fed keeps interest rate higher for now, Europe still hoping for rate cuts soon

The US Federal Reserve (Fed) is leaving its key interest rate unchanged at a high level in the face of stubbornly high inflation. Markets had a mixed reaction to the cautious statements made by Fed Chairman Jerome Powell. In Europe, on the other hand, economic data published on Tuesday fuelled hopes of a first interest rate cut in the summer.

Antonia Strachwitz, LGT
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5 minutes
Fed Gebäude Nahaufnahme
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The US Federal Reserve (Fed) announced on Wednesday that it would leave its key interest rate unchanged at a high level of between 5.25 and 5.5% in view of stubbornly high inflation. This means it remains at its highest level in over 20 years. However, Fed Chairman Jerome Powell stated that he expects inflation to fall over the course of the year and that a further rate hike is "unlikely". The cautious statements gave the US stock markets a brief boost yesterday, but were largely reflected negatively at the end of the day. The Dow Jones temporarily rose by 1.5%, but ultimately closed at 37,903.29 points, a small gain of 0.2%. The S&P 500 lost 0.3% and fell to 5018.39 points, while the Nasdaq 100 lost 0.7% and fell to 17,318.55 points.

There was no good news on the economic front from the US on Wednesday either. The Purchasing Managers' Index for the manufacturing sector fell from 50.3 in March to 49.2 - below market expectations of 50.0 - indicating that business activity declined in April.

In the Asia-Pacific region, markets reacted somewhat more positively to the Fed's statements. The Hang Seng Index in Hong Kong recouped its losses from the previous day and rose by 2.1%. Japan's Nikkei 225 was up slightly on the previous day, while the broader Topix rose by 0.1%. Australia's S&P/ASX 200 was up 0.4% and South Korea's Kospi was 0.1% lower, while the Kosdaq was unchanged. The dollar fell from around 157.55 to exactly 153 yen early this morning for reasons not immediately clear. Traders suspected it was due to another round of intervention by Japanese authorities to halt a sharp fall in the currency, with the 160 yen level seen as a key line of defence.

Europe's main stock markets were mostly closed on Wednesday due to the public holiday, with only the UK and Denmark open. Here too, the Fed's decision had a slightly negative impact on the Stoxx Europe 50, which fell by 0.1% to 4391.41 points.

On Tuesday, a series of positive economic data was published from Europe, Switzerland and China. GDP in both the eurozone and the EU rose by 0.3% in the first quarter of 2024, slightly exceeding forecasts. Inflation in the eurozone was in line with expectations and remained at 2.4% in April. German retailers were also able to significantly increase their sales in March, with revenue rising by 1.8% compared to the previous month. In France, annual consumer price inflation slowed in April to its lowest level since September 2021 (2.2% compared to 2.3% in March). These positive figures fuelled hopes of an interest rate cut by the ECB in the summer. 

The Swiss KOF Economic Barometer rose from 100.4 to 101.8 in April, slightly above expectations. The barometer is in a slightly above-average range, which indicates a stable but unspectacular outlook for the Swiss economy.

The purchasing managers' indices published by China on Tuesday also point to a continued recovery. The manufacturing sector further recovered in April and the non-manufacturing sector also maintained its momentum. The People's Republic accelerated the implementation of its macroeconomic policy in April and was thus able to strengthen demand. 

Finally, the reporting season continues this week. Volkswagen announced on Tuesday that it was unable to meet expectations in Q1 2024, while Adidas reported sales growth of +8%. Amazon also exceeded expectations and its share price rose by 2.2% as US markets closed on Wednesday. Finally, Pfizer also raised its outlook for 2024 after a better-than-expected first quarter. 

Corporate news in focus: Apple, ConocoPhillips

Economic data in focus: Retail sales and CPI Switzerland, PMI Manufacturing France, Germany

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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