- Nasdaq-100 – WKN: A0AE1X – ISIN: US6311011026 – Price: 11,593.77 Pkt (Nasdaq)
Party atmosphere after yesterday’s Fed meeting: I’ll come to the reasons in a moment. First, I would like to briefly review the Fed’s forecasts.
The Fed cut its economic growth forecast for the fourth quarter of 2022 to 1.7% year-on-year, after the central bank forecast growth of 2.8% in March. But then reality intervened once again.
At the same time, the Fed raised its forecasts for the fourth-quarter core PCE price index, the Fed’s preferred inflation indicator, to 4.3% yoy, only slightly up from 4.1. % of the March estimate.
In addition, as expected, the Fed raised key interest rates by 75 basis points (0.75 percentage points) between 1.50 and 1.75 percent – this is the largest increase since 1994. For the next meeting on July 27, the Fed chief did however, Jay Powell reported a 50 basis point or 75 point increase at the press conference. “I don’t expect increases of this magnitude (75 basis points) to become the norm,” said Powell.
At the same time, the Fed raised its forecast for key interest rates to 3.4 percent at the end of the year. From the current level, the Fed is expected to raise interest rates by nearly 175 basis points. In my view, the heavily indebted US economy can by no means cope with such a high level.
The US economy is on the verge of recession
At the press conference, however, Powell once again presented himself as a great inflation fighter. “The Fed is strongly committed to bringing inflation back to its 2% target,” the Fed wrote in its press release. After persistent weakness in economic data, investors are aware that the faster and stronger the Fed raises interest rates, the faster the US economy slides into recession, after which the Fed should react with even more interest rate cuts and a fresh start of QE printing money.
As a reminder, US retail sales in May surprisingly fell 0.3% m / m in May, according to data released today, while ever-optimistic economists had forecast a 0.1% increase. At the same time, the April plus was revised down from 0.9% to 0.7%. After all, US consumers may not be “in great shape,” as Powell said at the press conference.
After the release of US retail sales, the Atlanta Fed downgraded its forecast for second-quarter economic growth to zero percent from an annualized 0.9 percent. You read that right: 0 percent! This puts the economy on the brink of recession after economic output shrank by 1.5% annualized in the first quarter. The annualized value is calculated by multiplying the change from the previous quarter by four.
Precisely these investor recession concerns – and thus the expectation of an imminent repeat of QE – were clearly reflected in the bond market at the press conference and thereafter. Despite Powell’s statements, interest rates on US ten-year bonds did not rise, but rather plummeted, from 3.44 percent at 8:15 pm to 3.30 percent at 10 pm at the close in the United States. This means that the economy will no longer be as slow as it used to be.
The collapse in US interest rates pushes equities higher
And what do investors do when US interest rates go down? They are returning to equities, particularly highly valued growth stocks, followed by tech stocks, such as Apple, Amazon, Microsoft, Alphabet , Meta platforms And Netflix all of them recorded significant gains. Investors have therefore pushed equity markets higher for the completely wrong reason, but that shouldn’t matter to many investors and private investors.
Biggest Winner in S&P 500 was the S & P500 discretionary consumer goods sector, with heavyweights Amazon, Tesla , The home depot, McDonald’s Corp, NIKE, an increase of 3.0 per cent for the sector. The S & P500 party also raised the DAX noticeably after trading.
On the other hand, the collapse of US interest rates dragged the dollar lower, for example against the euro and the yen, after which the price of gold had favorable winds from two sides and also increased significantly. .
How could things continue in the equity markets of both sides of the Atlantic in the short term? In the short term, the S & P500 and DAX might as well Gold they continue to recover as Friday’s maturity date rapidly approaches, assuming US 10-year bond yields remain where they are, if not cut further. Fortunately, Thursday is still the Fed’s “blackout period”, which means Fed members are not allowed to comment on monetary policy. However, if interest rates, for whatever reason, turn up quickly, the recovery in the S & P500 and the DAX should wear out quicker than many investors are hoping for.
I analyze these and similar topics every Tuesday evening at 6 pm in the BNP Paribas program “Euer Egmond” EUR / USD And Gold it could go on. I would be happy if you watched the show.