At the FED meeting to be held on 27.07.2022, the market expectation is that there will be a 75 basis point interest rate increase. In addition to the interest rate hike, comments on inflation and growth and forward-looking guidance will be decisive.
There are a few important points we need to know before the data;
- There is a decline in inflation expectations due to the recent decline in commodity prices (inflation expectation for 1 year later decreased from 5.4% to 5.2%).
- There was no increase in personal consumption expenditures (PCE) after the decline last month. (%6,3) (Measures change in the cost of goods and services consumed by households)
- Retail sales rose above expectations in June.
- Housing sales also declined for the fifth month in a row.
- Company profitability continues to be strong.
- Michigan Consumer Confidence rose from 50 to 51.1.
- Commodity prices continue to decline
- The improvement in the supply chain due to the decrease in the impact of the closures due to the covid 19-induced 0 case policy in China are the points that can be evaluated positively.
Points that support a recession;
- U.S. companies expect lower profitability in the next few quarters and plan hiring accordingly.
- As losses in the labor market begin to mount, household spending can be expected to slow down.
- The latest services PMI data (down to 47.0 from 52.7) points to a slowdown in economic activity.
- Applications for unemployment benefits also hit a two-month high last week.
With the slowdown in economic activity, the risk of a contraction in the labor market weakens the Fed’s hand. At this point, he will have to make a choice. The market expectation is for a 75 basis point interest rate increase. In the name of managing inflation expectations and emphasizing the stable stance, a rate hike above 75 basis points brings sales to risky assets. However, apart from the 75bp-100bp discussion, the most critical point will be the guidance to be made in the meeting.
If there is a rate hike below 75 basis points, supported by the data that may come to show that the process of controlling inflation is progressing in a good direction, the demand for risky assets may increase in the market in the first place. However, it will be the course of inflation expectations that will determine the pricing afterwards. On the other hand, a rate hike below 75 basis points seems difficult as the 50 basis point cut will read the Fed’s easing signal and then it will be more difficult to manage expectations.
Our expectation is that there will be a 75 basis point interest rate increase in this meeting and 50 basis points in September.
Tugba Ozay | ICRYPEX Strategy Manager
