Week ending 29th July 2022.

The main focus for global financial markets this week was the Fed’s monetary policy meeting – and unsurprisingly given recent comments from policymakers, the central bank increased US interest rates by 0.75%.

However, the real interest to us was Jay Powell’s comments in the accompanying press conference – and thankfully we weren’t found wanting as it was everything we wanted and more.

The Fed chair accepted that the US economy was slowing and said that another “large” interest rate increase would only occur if inflation data wasn’t showing signs of slowing.

More importantly, Jay Powell acknowledged that the full effect of the Fed’s previous interest rate increases have not fully fed through yet – and this recognition clearly highlights to us that the Fed policymakers don’t want to be known as ‘the fools-in-the-shower’.

‘The fools-in-the-shower’ is a Milton Friedman analogy where a person gets burnt by hot water after they turn the hot water all the way up given the shower water initially came through cold – i.e. policymakers don’t want to aggressively increase interest rates without taking into account the impact of their previous increases.

Furthermore, the next Fed meeting isn’t until 21 September 2022.  Not only is that getting close to mid-term elections on 8 November, but obviously we will get an awful lot of important economic data releases between now and then, including two readings of both CPI inflation and US employment, not to mention PMI, retail sales and numerous economic and manufacturing surveys – all of which should start to show the impact of the Fed’s 2.25% interest rate increase so far this year.

Elsewhere, US data yesterday (28 July 2022) showed that the US economy had contracted for a second straight quarter, while the quarterly core PCE (personal consumption expenditures price index which excludes volatile items such as food and energy and is the inflation measure preferred by the Fed officials), grew an annualised rate of 4.4%, which is well down from the previous quarter’s annualised growth of 5.2%.

This all confirms to us that the Fed is very likely to pull back on its interest rate increases much sooner than financial markets are currently expecting (and therefore pricing-in) – which is very positive global equity markets.

Looking ahead to this coming week, we have US ISM; US employment data (non-farm payrolls; unemployment rate; participation rate; and average earnings); US factory orders; Eurozone retail sales; Eurozone PPI; and Chinese PMI.

Additionally, here in the UK, BoE policymakers meet to discuss UK interest rates.  Markets are expecting, and therefore have priced-in, an increase of 0.5% to 1.75% – which if correct, would be the biggest increase we’ve seen since February 1997.

Investment Management Team