EXANTE Monthly Macro Insights

EXANTE Monthly Macro Insights
  • The Fed charges ahead
  • Europe’s energy pinch?
  • The ECB’s debt and inflation conundrum
  • EXANTEN Prize winner revealed

S&P 500 ↑ 7.6% MTD and ↓ 14.6%  YTD
Nasdaq 100 ↑ 10.5% MTD and ↓ 20.1% YTD
Dow Jones Industrial Average ↑4.6% MTD and ↓ 11.4% YTD
NYSE Composite ↑ 4.9% MTD and ↓11.5% YTD

Stoxx 600 ↑ 6.3% MTD and ↓ 11.3% YTD
DAX ↑ 3.9% MTD and ↓ 16.4% YTD
CAC 40  ↑ 7.0% MTD and ↓ 11.4% YTD
FTSE 100 ↑ 2.5% MTD and ↓ 0.5% YTD
IBEX35 ↓ 0.2% MTD and ↓ 7.2% YTD
FTSE MIB ↑ 3.0% MTD and ↓ 19.8% YTD

MSCI World Index ↑ 4.3% MTD and ↓ 17.5% YTD
Hang Seng ↓ 5.7% MTD and ↓ 11.9% YTD

Note: As of 6:30 pm EST 28 July 2022

The Fed keeps going. In an unanimous decision by FOMC members, the US Federal Reserve hiked rates by 75 bps at its latest meeting on 27 July. Chairman Jerome Powell said that the Fed may still do an “unusually large” rate hike in future, but all moves will be data dependent on a meeting by meeting basis only and there would be no more "guidance". He insisted the US was not in recession given the continuing strong labour market. The White House has also pushed back against the talk of recession in an attempt to keep voters on side ahead of the  8 November midterm elections. Corporate profits, according to Refinitiv data, are continuing to rise, with Q2 S&P 500 earnings looking to be up 7.6% y/o/y. Nevertheless, markets are focused on the 0.9% drop in GDP in Q2, following the drop of 1.6% in Q1, with many now expecting the Fed to ease the level of rate hikes in an effort to engineer a softer landing. 

Europe’s energy insecurity. EU member countries face a rising recession risk as the bloc has largely agreed to cut its natural gas consumption by 15% over the next eight months in a bid to reduce its dependency on Russian energy. Natural gas prices increased as much as 14% and are, according to Bloomberg data, more than 10 times higher than the usual level for this time of the year as Russia limited the supply of gas through Nord Stream 1 to only 20% of capacity. Germany, the EU’s largest economy and most dependent on Russian energy, is coming under pressure from Spain, Portugal, Italy and Greece to do more to rebalance energy interconnectivity across Europe. And, as forward natural gas and electricity prices continue to rise, there will be a higher cost to regional governments to provide subsidies to consumers, potentially hitting longer term debt dynamics.

Eurozone in the doldrums. Eurozone inflation hit 8.6% in June, forcing the ECB to finally take action and raise interest rates for the first time since 2011. It raised its benchmark rate by 50 bps. Inflation has now jumped to 8.9% in July, driven once again by soaring energy and food costs. The ECB will come under increasing pressure to hike rates even further, despite the recession risks, with Governing Council member Martins Kazaks already urging a “quite significant” increase in September. Others will cite falling consumer confidence levels, i.e., the economic sentiment indicator (ESI)  hit a 17-month low at 99 in July, down from 103.5 in June, falling composite PMIs, i.e., 49.4 in July, down from 52 in June, as reasons for the ECB to slow down the pace of rate rises. However, at least for now, recession is at bay with Eurozone GDP up  0.7% q/o/q in the April-June period and up 4.0% y/o/y according to Eurostat estimates, as France, Italy and Spain all grew despite Germany’s stagnating last month.

A rate rise is also raising questions about the new Transmission Protection Instrument (TPI) and how it could really be an effective mechanism when the ECB had suggested further rate rises may be necessary this year. There is also concern that growing political instability within the Eurozone, particularly in Italy where prime minister Mario Draghi recently resigned, has also worsened the outlook for the Eurozone.

And the envelope please… We are very pleased to announce that the winner of the EXANTEN Prize is Jędrzej Walów from Poland! After deep deliberation, the judges agreed that Mr Walow provided the best forecast and economic and geopolitical analysis in support of that forecast. Congratulations to Jędrzej Walów! 

Again our apologies for the delayed announcement of the winner. This was due to judges being unavailable due to Covid. 

Key events in August

3 August 2022 OPEC+ meeting. Markets will be looking to see if the group will keep output unchanged for September or consider any increases in production. 

4 August 2022 Bank of England Monetary Policy meeting. As inflation is now expected to reach 11% in October the pressure is on the BoE to raise rates. BoE Governor Andrew Bailey has said that the BoE is considering a half-point interest rate hike in August. However, with consumer confidence remaining at a historic low of -41 and the S&P Global/CIPS UK Services PMI falling to 53.3 in July of 2022 from 54.3 in June, demand growth is expected to weaken further in the coming months, meaning that too high a level of hikes may accelerate recession risks.

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This article is provided to you for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced here.

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