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LGT Navigator: Wall Street awaits nervously the Fed's next interest rate move

May 2, 2022

On the New York Stock Exchange, the indices ended last week with significant losses. On the one hand, disappointing quarterly reports from some technology companies and, on the other hand, the imminent interest rate tightening by the Federal Reserve made investors cautious. Given the many factors of uncertainty, such as the war in Ukraine and the conflict with Russia, as well as the economic impact of the corona lockdowns in China, volatility on the stock markets is likely to remain high soon. Europe's economy had a mixed start to the year, according to growth data published Friday, while inflationary pressures continue to mount.

Wall Street awaits nervously the Fed's next interest rate move

The Dow Jones Industrial suffered another sharp setback on Friday, closing -2.77% lower at 32'977.31 points. Thus, the Dow lost about -2.5% for the week and about -5% for the month of April. The S&P 500 went at the end of the week -3.63% lower from trading at 4'131.93 points and on the technology exchange Nasdaq the losses were even stronger with about -4.5%. The Nasdaq indices thus fell to the lowest level in more than a year. In the monthly performance for April, indices on the technology exchange lost about -13%! Among other things, the disappointing quarterly results of Amazon also had a negative impact. Increased costs caused a profit slump of almost -60% and the outlook for the current quarter is characterized by caution.

The focus is now the upcoming meeting of the Federal Open Market Committee (FOMC) of the Federal Reserve on Wednesday evening. An interest rate step of at least 25 basis points is expected, although the last statements by Fed Chairman Powell and some of his colleagues pointed to a stronger interest rate step of 50 basis points. In the bond market, the yield on ten-year US government bonds rose again to 2.92%.

This week, in addition to the Fed's decision and other important corporate results with a focus on Europe, in particular the latest purchasing managers surveys are in focus.

Inflationary pressure in the US further strengthened - Fed before further interest rate step

The inflation index (PCE), which is based on consumer spending and is favored by the Federal Reserve (Fed), rose in April to +6.6% for the year from +6.3% in March. As early as Wednesday, the Fed is expected to take a stand against rising inflationary pressures with another rate hike. The only question is whether the rate step will be 25 or 50 basis points.

Energy costs drive inflation in the euro area to a new high

In the eurozone, consumer prices continued to rise in April, driven by the explosion in energy costs (+38%). On an annual basis, the inflation rate reached a new record high of +7.5%. Compared with the previous month, the cost of living also rose strongly by +0.6%. The core rate, excluding energy and food prices, climbed from +2.9% in March to +3.5% in April. The pressure on the European Central Bank (ECB) to respond soon with a first interest rate hike is thus steadily increasing. 

Europe's economy with a mixed start to the year

As expected, the euro economy grew moderately in the first quarter by +0.2% compared with the previous quarter. The pace of growth thus slowed in the opening quarter compared with the final quarter of 2021, when GDP expanded by +0.3%. The economic outlook for the current second quarter is also clouded by the economic consequences of the Ukraine war, sharp energy price jumps and ongoing supply chain problems.

Germany's GDP increased moderately by +0.2% in the first three months compared with the previous quarter. Thus, Europe's largest economy achieved at least mini-growth, despite the still high Covid-19 cases in Q1 and thanks to higher investments. In the final quarter of 2021, German economic output had still contracted by -0.3%. The German government has already lowered its growth forecast for 2022 to +2.2% from +3.6% previously.

The Italian economy got off to a weak start in the new year, posting a -0.2% quarter-on-quarter decline in GDP.

Spain's GDP grew less than expected in the first three months of the current year. Although economic output increased by +0.3% quarter-on-quarter in the first quarter, it was only half as strong as economists had forecast. In Q4 2021, the fourth-largest economy in the eurozone had still grown by +2.2%.

Russia's central bank lowers key interest rate

Apparently, to mitigate the effects of the sanctions imposed by the West, the Russian central bank eased its monetary policy and lowered its key interest rate from 17% to 14%. This even though inflation in Russia reached almost +18% in April.

  

Economic Indicators May 2

MEZ Country Indicator Last period
00:00 UK Bank Holiday
08:00 GE Retail Sales (April) +0.3%
09:00 SZ Seco Consumer Climate (Q2) +3.0
09:15 ESP PMI Manufacturing (April) 54.2
09:30 SZ PMI Manufacturing (April) 64.0
09:45 IT PMI Manufacturing (April) 55.8
09:50 FR PMI Manufacturing (April) 55.4
09:55 GE PMI Manufacturing (April) 54.1
10:00 EZ PMI Manufacturing (April) 55.3
11:00 EZ Economic Sentiment (April) 108.5
11:00 EZ Business Climate (April) +1.67
11:00 EZ Consumer Confidence (April) -16.9
15:45 US PMI Manufacturing (April) 59.7
16:00 US ISM PMI Manufacturing (April) 57.1

 

Earnings Calender May 2

Country Company Period
SZ Transocean Q1
US Expedia Q1 
US Avis Budget Q1
US Moody's Q1 

 

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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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