1st August 2023
US stocks surge amid improving economic data
US stocks increased last week as a result of good economic data and declining inflation rates, which raised confidence that the country could manage inflation while expanding the economy.
In June, inflation dropped to only 3%, compared to 3.8% in May – which is now only 1% more than the Federal Reserve’s 2% goal.
‘Core’ inflation, which excludes costs for food and energy, decreased more than anticipated to 4.1%. Core inflation can help provide a steadier picture of actual inflation by excluding more volatile sectors (it won’t be as influenced by a rise in the price of oil, for example).
Markets speculate as Fed resumes rate hikes
The Fed convened last week and decided to resume interest rate increases after suspending them in June. Interest reached its highest level in 22 years after the agreed-upon 0.25% rate rise.
Following a delay in June, markets had already largely anticipated this move, so the messaging style that accompanied the rate hike was of more importance. Investors might try to assess the mood within the Fed through speeches and communications from key decision-makers in an effort to better predict future actions.
Given this, Fed chairman Jerome Powell said:
“It is certainly possible that we would raise the funds rate again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady.”
Chief Investment Officer of BlueBay Asset Management, Mark Dowding, said this meeting “passed without much comment”. He added:
“Money markets are evenly split in terms of whether this week’s hike will be the last of the cycle or whether there will be one further move to come in September or in Q4.”
Since rates have already reached a 22-year high of 5.5%, Dowding speculates that the Fed is likely close to stopping rate rises overall for the time being.
Interest rate impact on US economy
Questions regarding the potential reduction of interest rates are anticipated to arise once inflation returns to normal.
Although it is a crucial factor to take into account, the Fed will also be looking at other factors. It will also examine the overall state of the US economy. Powell and his peers may be pleased in this case.
Economists will often look at these inflationary eras through the lens of the Goldilocks story. An increase in interest rates might cause the economy to enter a recession. Runaway inflation may occur if the Fed doesn’t take strong action. A ‘soft landing’ – where inflation is kept under control without sparking a recession – can, however, happen if they get it ‘just right’.
Strong US economy defies market projections
This Goldilocks story was reinforced by fresh GDP data from the previous week. The US reported that its economy expanded 2.4% year-on-year in the second quarter. This was far above market projections and higher than the 2% figure from the first quarter.
It was no surprise that US markets enjoyed a favourable week, given that inflation is declining and the economy appears to be doing well. For instance, the S&P 500 increased 1.01% for the week. Once more, the huge tech mega-caps were mostly responsible for this performance.
European markets show slow inflation decline
The markets in Europe were less active. Although inflation has been declining on this side of the Atlantic as well, it has done so more slowly and in tandem with a slowdown in economic growth.
The FTSE 100 companies’ performances varied in the UK, where inflation is still greater than in the US, and the weekly return was only 0.4%.
Similar results were seen in France, where the CAC 40 returned 0.59%. The German DAX Index increased 1.81% in the meanwhile.
Even though the European Central Bank raised interest rates last week, there is a growing feeling that these rate hikes are nearing their conclusion as inflation continues to decline throughout the continent.