An Eventful July – The Storm Before the Calm?

July has certainly been an eventful one for equities, precious metals and for U.S. stock indices accordingly. Not only did the month see above expectation inflation data, but also the latest FOMC deliberations, official statistics appearing to show that the U.S. was already in recession, and strong denials from President Biden and Fed Chair Powell that this was actually the case.

The principal catalyst for the wide range of activity will have been the well above expectation Consumer Price Index (CPI) data release from the Bureau of Labor Statistics for June which showed a year-on-year inflation increase of 9.1% – the largest 12-month rise since November 1981 and well above market consensus of 8.8%. Initial reaction in the markets was frenzied and even prompted the CME’s Fedwatch Tool to briefly predict an above 80% chance that the U.S. Federal Reserve would implement a full 1% interest rate rise at the recently-concluded FOMC meeting. Subsequently the market expectations cooled very substantially, and immediately ahead of the meeting, expectation of a 1% rate rise had declined to around 30% and the Fed duly complied with this much lower expectation.

Over the month the Nasdaq-100 fluctuated between around 11,600 and 12,620 – the nadir being reached right at the beginning of the month and a secondary trough at around 11,730 on the day the CPI data was announced. The other major stock indices reacted in a similar manner to each other with their lows reached the day after the CPI announcement and somewhat steeper rises immediately thereafter. Overall perhaps the performance of all three major stock indices was a little surprising given the impression that the US economy was almost certainly already in a technical recession and was perhaps likely to remain there for some time to come, albeit perhaps not too severe a one.

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The past week’s FOMC meeting passed with the Fed raising interest rates, as generally expected, by 75 basis points, but the interpretations of Fed chair Jerome Powell’s subsequent statement and the ensuing press release proved to be somewhat varied. Powell did state quite categorically that the US was not in a recession, although the latest official figures of Q2 GDP estimates a day later came up with a 0.9% contraction which suggests that technically, at least, the US probably is already in recession as this is usually defined as two successive quarters of negative GDP growth. 

Part of Powell’s statement was taken as suggesting that the likely September rate increase might be a little lower and the markets moved accordingly. However, at the same time he also intimated that inflation was still a major concern and if it remained high a repeat of the 75 basis point rate increase, or even greater, might be on the cards.

If one goes by market reaction, and the path of the Fedwatch tool, the markets are very definitely for now anticipating the lower rate hike in September and have moved accordingly. 78% are expecting only a 50 basis point rate increase in September, and 22% a 75 basis point rise, in the aftermath of the July FOMC meeting and statement. Gold, silver, equities and bitcoin all took off on an upwards path and the dollar index fell quite sharply in initial trade, although there were some small signs of a slight cooling down in equities and bitcoin ahead of the month end.

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We suspect a more sober analysis of the likely picture will emerge over the next few days and weeks – particularly now the official statistics seem to contradict Powell’s and Biden’s optimistic views on whether the U.S. is in an economic recession or not. Both gentlemen seem convinced that the underlying picture – particularly with regard to relatively strong employment – means that a true recessionary impact is not with us, at least not yet. I suppose this fits the softish landing political spin put out by the Fed and the Administration a little better.

Gold and silver did both receive something of a sharp leg up though. – particularly silver which had previously suffered a pretty weak couple of weeks The possible easing of interest rate rises does suit their price progress a little better. Looking forward their price path may well remain reasonably positive failing any specifically adverse data releases until the end of the summer holidays. Labor Day, on September 5th, may provide something of an inflection point for equities and precious metals, though. Markets may well remain relatively calm up until then with reduced volumes unless some major event disturbs their equilibrium. The September FOMC meeting on September 20th and 21st, or the September CPI announcement on the 13th could provide some fireworks and set the paths for both equities and precious metals for the remainder of the year and for early 2023.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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