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LGT Navigator: Traders bet on a super-sized rate hike by the Fed

July 14, 2022

In the US, inflation climbed to its highest level in forty years in June. Now, traders speculate that the Federal Reserve could raise key interest rates by +100 basis points in July. On Wall Street, the first major US banks present their quarterly figures today. 

Gasoline prices

The sharp rise in US consumer prices in June has sent stock markets on a roller coaster ride on Wednesday. Analysts had expected an already substantial price growth of +8.8% year-on-year. With +9.1%, however, the actual inflation rate was even higher. Excluding volatile energy and food prices, core inflation was +5.9%, which was also above expectations (+5.7%). 

US stock markets coped reasonably well with the initial shock after the publication of the data. The Dow Jones lost -0.7% by the close of trading, after falling as much as -1.5% in early trading. The S&P 500 lost -0.5% after briefly moving into to the profit zone, and the Nasdaq Composite closed -0.2% lower. 

The latest data dashed hopes that inflation may have already topped out. Price growth has been broad-based, with gasoline prices rising particularly rapidly (+11.2% month-on-month). However, spending on food and shelter has also risen again. This development is increasing the pressure on the Federal Reserve (Fed) to raise key interest rates significantly in July. Traders of futures tied to the Fed's policy rate are now pricing a 80% probability of a full percentage-point rise at the coming meeting, as data from the CME Group show. Before publication of the current inflation data, the probability merely stood at just under 8%. “Everything is in play”, said Raphael Bostic, President of the Atlanta Fed, when asked whether an interest rate step of more than 75 basis points will be possible. 

Rapid price growth is also hurting incumbent US President Joe Biden. In the upcoming midterm elections in the fall, Democrats must defend their razor-thin majority in the Senate and the House of Representatives. However, high inflation is clouding voter sentiment and giving Biden record low popularity ratings. 

Asian stock exchanges are moving higher on Thursday. The Nikkei gains in Tokyo +0.8%. The Hang Seng is up +0.2% in Hong Kong and the Shanghai Composite gains +0.4%.

US major banks kick-off earnings season

Today, Wall Street heavyweights kick-off the reporting season. US major banks traditionally lead the way, with JP Morgan Chase and Morgan Stanley presenting their figures for the second quarter today. Their competitors Citigroup and Wells Fargo will follow on Friday. The companies are looking back on a difficult six months, marked by high inflation, supply shortages and problems recruiting employees. The harsh economic climate is also clouding consumer sentiment. Investors will therefore be scrutinizing the results closely to assess how and whether the companies are withstanding the adverse environment. 

The data services provider Factset expects S&P 500 companies to report earnings growth of +4.3% for the second quarter on an aggregate basis. This corresponds to the lowest growth since the final quarter of 2020. A number of companies have already adjusted their earnings forecasts downward in advance. According to Factset, the financial sector, cyclical consumer goods and utilities are likely to report the largest drop in profits. In contrast, analysts expect earnings growth in the energy sector.

Inflation in Germany weakens

As expected, inflation in Germany weakened slightly in June. Compared with the same month a year earlier, prices rose by +7.6%. In May, inflation stood at +7.9%. Price growth was dampened by the so-called fuel rebates – the reduction in energy tax on fuels – and the 9-euro ticket for public transport. Both measures, which are limited to three months, came into force at the beginning of June to ease the burden of rising prices on the population. 

In France, on the other hand, inflation has picked up again. In June, consumer prices rose by +6.5% year-on-year. This is the fastest growth since 1999, when the euro was introduced as book money. In the previous month, inflation was still +5.8%. Prices in Spain also rose rapidly in June, increasing by +10% year-on-year (May: +8.5%).

Economic Indicators July 14

MEZ Country Indicator Last period
06:30 Japan Industrial production (May, m/m) -7.2%
08:30 CH Producer prices (June, m/m) +0.9%
14:30 US Producer prices (June, m/m) +0.8%


Earnings Calender July 14

Country Company Period
US JP Morgan Chase Q2
US Morgan Stanley Q2


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