Weekly Market Outlook

Weekly Market Outlook: Fed Heads Towards Another 75 bps Hike, AUD Inflation in Focus

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Weekly Market Outlook – Following last week’s ECB decision to raise deposit rates to 0% after eight years of negative rates, the FOMC rate decision will be the main highlight this week. The Fed is on track for another 75 bps rate hike for the second meeting in a row. The US calendar is the busiest this week as markets will be watching multiple earnings reports, Q2 Advance GDP figures, consumer confidence as well as PCE inflation numbers. Elsewhere, it will be a quiet week for many countries. Australia will be releasing its inflation report for the second quarter.

USD – Fed Heads Towards Another 75 bps Hike

The last couple of weeks have witnessed volatile interest rate expectations for the upcoming FOMC meeting, but now market consensus shows that another 75bp hike in July is fully priced in. Rising energy prices and soaring inflation to another four-decade high are backing more hikes, albeit smaller, in September and November and December.

According to the FedWatch tool, more than 76% are expecting a 75 bps rate hike, with 23.7% anticipating a full point hike, mirroring Bank of Canada’s recent move. That came after the June 9.1% inflation surge, which could leave the Federal Reserve in a desperate position trying to get a grip on the accelerating inflation.

Weekly Market Outlook - Fed Rate Decision
Source: CME Group

Several FOMC members have backed a 75 bps hike, with all options still on the table to bring inflation near the 2% target.

Economists have expressed concerns about a cooling economy, and opposing aggressive tightening by the Fed which may unintentionally trigger a recession. Meanwhile, recession risks remain elevated and expectations are now heading for possible rate cuts by mid-2023.

Around a third of S&P 500 companies will be publishing their quarterly results this week including Microsoft, Google, Apple, Amazon, Meta Platforms, Ford and Intel.

On the data front, the US will release the advance estimates for Q2 GDP. Data is expected to show an annualized growth of 0.9% in June, rebounding from a 1.6% contraction in the first quarter. On a quarterly basis, the economy is set to grow by 4.4% between April and June, compared to 5.2% growth in the previous quarter.

Other key releases to watch include consumer confidence, personal income and PCE inflation.

AUD – All Eyes on Inflation

Inflation is expected to ease on a quarterly basis to 1.9% from 2.1% in March quarter. Earlier this month, the Reserve Bank of Australia raised cash rates by 50 basis points to 1.35%, citing high global inflation “boosted by COVID-related disruptions to supply chains, the war in Ukraine and strong demand which is putting pressure on productive capacity.”

However, the bank stated that domestic inflation is not as high as it is in many other countries. And that both global and domestic factors account for much of the increase in inflation in Australia. Such factors include strong demand, a tight labour market and capacity constraints in some sectors which are putting upward pressure on prices.

The bank expects inflation to peak later this year before declining back towards the 2–3% range next year. Easing global supply-side problems and stabilizing commodity prices, even if at a high level, would help inflation to moderate.

In the meantime, higher interest rates will help in establishing a more sustainable balance between the demand for and the supply of goods and services, the statement acknowledged.

“Medium-term inflation expectations remain well anchored and it is important that this remains the case. A full set of updated forecasts will be published next month following the release of the June quarter CPI.” RBA Policy Statement – July 2022

The upcoming data will show if the bank has to continue its policy tightening for the remaining meetings this year to rein in inflationary pressures that haunt the local economy.

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