Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
US Fed raises rates as economy contracts for the second quarter
The US Federal Reserve (Fed) raised rates by 0.75%, the second such rise in two months. This means its target range is now at 2.25 – 2.50%, making this the most aggressive monetary tightening cycle since 1981.
The fact that the committee agreed to the rate rise unanimously demonstrates how determined the Fed is to bring down inflation, which is surging at the fastest rate in over four decades. However, this has coincided with the release of GDP data showing that the US economy shrunk by 0.9% year-on-year, a decline of 0.2% from the previous quarter. This is the second quarterly decline, meaning that by some definitions the US economy is now in a technical recession. Officially, the NBER is yet to determine that the US has entered into a recession.
The Fed also announced it would halt giving forward guidance on any further increases, in light of the complexity of the economic environment. While further rate hikes are being forecast by the market, Fed chair Jay Powell’s comments that the rate of rises may need to slow saw markets bounce.
Eurozone Q2 GDP surprises to the upside
Despite warnings of an impending recession, Eurozone GDP came in at 0.7% for Q2, far outstripping the 0.2% expected by the market. The means GDP growth is now 4.05% year-on-year, with the recent beat led by the services sector where the tourism industry has enjoyed a terrific rebound from the Covid lockdowns.
Germany provided a slight disappointment, with flat GDP. However, it has so far managed to avoid a technical recession despite its reliance on Russian gas. Italy also surprised the market but to the upside. GDP surged to 1.0% over the quarter vs consensus forecasts of 0.3%.
Whilst this is positive news, recent data releases from European leading indicators show signs of an impending slowdown, with a possible recession later this year or in 2023. The picture is further muddied by surging inflation and the threat of a more prolonged cut-off from Russian gas supplies going into the winter.
It was a positive week across US equity markets, with the S&P 500 ending the week up over 4% and the tech-dominated NASDAQ finishing almost 5% up. The S&P 500 now ends July up over 9%, the biggest monthly gain since November 2020. China had a more disappointing week, closing at almost 4% down, as measured by the MSCI China index.
UK gilts also ended the week in positive territory, with the benchmark for index-linked bonds, BAML UK IL Gilts, finishing almost 6% up.
To add to inflationary concerns, the benchmark for oil, Brent Crude, had another positive week, climbing by almost 7%.
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