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LGT Navigator: Fed continues to tighten interest rates sharply

July 28, 2022

US Federal Reserve Chairman Powell announced last night, as expected, a renewed tightening of the key interest rate by 75 basis points. The Federal Reserve continues to focus on the fight against inflation, but in the longer term must also increasingly consider the risk of recession. On Wall Street, the fourth rate hike since the start of the corona pandemic was well received, with further quarterly reports from major blue chips taking center stage and providing a strong tailwind. 

Fed continues to tighten interest rates sharply

The Federal Reserve tightened the reins further, raising its key interest rate again by three-quarters of a percentage point to a range of 2.25-2.5%. The Fed thus continues to signal its determination to counter inflation in the US, which has now risen to over 9%. The strong inflationary pressure is increasingly putting pressure on the purchasing power of consumers and is thus increasing the risk of an economic downturn, or the fear of a recession. Central Bank Chairman Jerome Powell emphasized that the central bank would continue its fight against galloping inflation and that a further, if necessary, again strong, interest rate step must be expected as early as September. At the same time, Powell expressed confidence that the interest rate turnaround (at least so far) has not yet resulted in a recession in the US economy – in particular, he said, the labor market trend remains robust. However, a slower pace of growth would be necessary to get inflation under control. The direction of monetary policy therefore remains a delicate balancing act.

Today, a new estimate of gross domestic product (GDP) for the second quarter is eagerly awaited. There are many indications that the economic output of the world's largest economy also declined in Q2.

On the New York Stock Exchange, stock indices reacted with some strong gains, with the focus here being on some further quarterly results from important companies, particularly in the tech sector. The Dow Jones Industrial recorded a daily gain of +1.37% and ended trading at 32,197.59 points. Even stronger gains were made by the broad S&P 500 and the indices on the Nasdaq technology exchange. The S&P 500 rose by +2.62% to 4,023.61 points and on the Nasdaq, price gains of large tech companies drove the indices up by more than +4% – the strongest daily increase since November 2020. For example, the tech heavyweights Microsoft, Texas Instruments and Google holding Alphabet were able to convince.

On the bond market, the reactions to the decision of the Federal Reserve were moderate. The yield on ten-year US government bonds settled just below 2.8%. The US dollar was unable to benefit from the further increase in the interest rate differential and traded around the 1.02 mark against the euro.

Asian stock markets tend on Thursday mostly positive. In Tokyo, the Nikkei 225 trades about +0.25% higher. China's benchmark index CSI 300 advances about +0.5% and in Shanghai, the Composite Index also trades about half a percent higher. 

Strong order intake in US industry

In the US, orders for durable goods - with a shelf life of at least one year – rose surprisingly strongly in June. Compared with the previous month, orders rose by +1.9%, while analysts had on average expected a decline of -0.4%. Orders for capital goods, excluding defense equipment and aircraft, rose by +0.5%. This figure is regarded as a reliable indicator of companies' propensity to invest.

German consumer sentiment remains in the cellar

According to the latest survey results of the Nuremberg-based consumer research company GfK, German consumer confidence has deteriorated further. The consumer climate indicator fell to another record low of minus 30.6 points – the lowest value since data began to be collected for the whole of Germany in 1991. The background to this remains the rising energy and food prices as well as the uncertainties resulting from the war in Ukraine.

Sentiment also deteriorates further in France and Italy

The mood of French consumers deteriorated further in July. The consumer confidence indicator fell from 82 to 80 points - the seventh monthly decline in succession. In the eurozone's third-largest economy, consumer and business confidence also deteriorated further in midsummer. Consumer sentiment fell from 98.3 to 94.8 points (consensus 96.6) and the business climate barometer declined by 2.6 to 110.8 points.

 

Economic Indicators July 28

MEZ Country Indicator Last period
11:00 EZ Economic Confidence (July) 104.0
11:00 EZ Business Climate (July) +1.47
11:00 EZ Consumer Confidence (July) -27.0
14:00 GE Consumer Prices (July, y/y) +8.2%
14:30 US GDP Q2 (q/q) -1.6%
14:30 US Consumer Spending Q2 (q/q) +1.8%
14:30 US Initial Jobless Claims (weekly) 251,000

 

Earnings Calender July 28

Country Company Period
SK Samsung Q2
SZ Nestlé H1
SZ Clariant Q2
GE Linde Q2
NL Stellantis H1
FR Sanofi Q2
FR L'Oréal H1
FR Totalenergies H1
FR Scor H1
FR Schneider Electric Q2
FR EdF Q2
FR Air Liquide Q2
FR Capgemini H1
IT Enel H1
IT Prada H1
ES Telefonica Q2
ES Repsol H1
ES Banco Santander Q2
LUX ArcelorMittal H1
UK Diageo H1
UK Barclays H1
UK Anglo American H1
UK Shell H1
US Apple Q2
US Pfizer Q2
US Merck & Co Q2
US Mastercard Q2
US Amazon Q2
US Intel Q2

 

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Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

 

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