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LGT Navigator: Fed emphasizes its priority of fighting inflation

July 7, 2022

In its minutes of the last interest rate decision, the Federal Reserve noted that further strong interest rate steps are to be expected in view of the persistently high inflationary pressure. In Europe, stock markets recovered midweek from the recent setback to their lowest level since November 2020. However, uncertainty remains high, especially in Europe.  For example, according to Commission President von der Leyen, the EU must prepare for a complete loss of gas supplies from Russia. In these uncertain times, the Swiss franc is shining, currently marking record levels against the euro.

Fed emphasizes its priority of fighting inflation

On the New York Stock Exchange, volatility and nervousness continued. The Dow Jones Industrial closed at 31,037.68 points +0.23% moderately higher than the previous day, when the index had temporarily fallen below 30,400 points. The S&P 500 gained +0.36% to 3,845.08 points at midweek and on the Nasdaq, the indices recorded a daily gain of around +0.6%. The minutes of the Federal Reserve and the latest survey results of the ISM on sentiment in the US service sector failed to provide any real impetus, but rather confirmed the already established recession and inflation fears and the prospect of further interest rate hikes. On the bond market, the yield on ten-year US government bonds climbed again to 2.93% and thus back toward the three-percent mark. The Asian stock markets are trading broadly firmer today. In Tokyo, the Nikkei 225 trades around +1.6% higher. 

Fed sees significant risk of inflation becoming entrenched

The transcript of the explanatory statement of the latest interest rate decision of the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) on June 15. reiterates the prospect of further interest rate hikes to get inflation under control. Accordingly, at the next monetary policy decision on July 27, a further sharp increase in the key interest rate of 50 or even 75 basis points can be expected. The Fed noted that there was a considerable risk that the inflation trend would become entrenched. To get inflation under control, it would also have to accept that economic growth would weaken. On the last interest rate decision, the Fed had already raised its key rate for the third time and, with a major interest rate increase of 75 basis points to 1.5-1.75%, reaffirmed its determination to curb the rise in inflation. In the US, consumer price inflation reached a new high of +8.6%.

Sentiment in the US service sector at its lowest level in more than two years

According to the latest survey of the US service sector, the assessment of the business climate and outlook in June was at its worst since May 2020. At least the Purchasing Managers' Index of the Institute for Supply Management (ISM) fell slightly less than analysts had expected, from 55.9 to 55.3 points (consensus 54.0). This means that the PMI also remains well above the growth threshold of 50 points. Logistical challenges, inflation, material shortages as well as a limited labor supply and uncertainties due to the Ukraine war continue to negatively impact the services sector, the ISM commented.

Swiss franc flexes its muscles

The euro fell against the Swiss franc at times to around 0.9880, the strongest the franc has ever been except for Jan. 15, 2015, when the Swiss National Bank (SNB) removed its minimum euro exchange rate of 1.20. Since the SNB surprisingly raised its key interest rate by 50 basis points on June 16, thus pre-empting the ECB, the appreciation pressure on the franc has intensified. At the same time, the euro is weakening against the backdrop of the feared energy crisis in Europe.

EU must prepare for complete loss of Russian gas supplies

EU Commission President Ursula von der Leyen warned that EU countries must prepare for further interruptions or a complete loss of gas supplies from Russia. Currently, twelve EU countries are already directly affected by a partial or complete loss of gas supply from Russia, von der Leyen told the European Parliament. Against this background, the EU Commission would present a European emergency plan as early as mid-July, which would enable coordination and joint action. The internal market and industry supply chains must be protected at all costs, the EU executive chairwoman explained. However, she added, the EU has already made progress. For example, non-Russian liquefied natural gas (LNG) exports to Europe have increased by about 75% year-to-date since March, and exports of LNG from the US to Europe have nearly tripled.

Economic Indicators July 7

MEZ Country Indicator Last period
07:45 SZ Unemployment Rate (June) 2.2%
08:00 GE Industrial Production (May, m/m) +0.7%
13:30 EZ ECB Minutes 
14:15 US ADP Employment private sector (June) 128,000
14:30 US Initial Jobless Claims (weekly) 231,000
14:30 US Trade Balance (May) USD -87.1bn
19:30 GE Bundesbank President Nagel speaks

 

Earnings Calender July 12

Country Company Period
US Pepsico 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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