Market Watch: July 29, 2022

As expected, the U.S. Federal Reserve raised its overnight rate by 75 basis points to a range between 2.25% and 2.5%. Fed Chair Jerome Powell reiterated the central bank’s commitment to “returning inflation to its 2% objective” and also stated his view that the U.S. economy had not yet slipped into a recession. U.S. equity markets rallied Wednesday afternoon after the Fed’s announcement. By the day’s close, the S&P 500 rose 102 points, the Dow climbed 436 points, and the Nasdaq had its biggest one-day percentage gain in over two years, jumping 470 points. In Canada, the TSX closed up 282 points, buoyed by the energy and materials sectors. It was the index’s highest closing level since June 27.

According to the U.S. Commerce Department on Thursday, U.S. economic output fell in Q2 by 0.9%, the second consecutive quarterly drop in activity. Whether the U.S. is actually in a recession isn’t quite so easy to say. While many economists identify two consecutive quarterly declines in GDP as a technical recession, the government’s National Bureau of Economic Research has the final say. Even if the U.S. isn’t in a recession now, the drop-off in economic activity makes a recession look almost inevitable.

Despite the downbeat GDP data, North American equity markets had a strong performance, as corporate earnings were resilient. By Thursday’s close, the Dow rose 332 points, the S&P 500 added 48 points, and the Nasdaq climbed 130. In Canada, the TSX jumped 202 points, buoyed once again by the materials sector.

North American Markets Climb, Despite Fed Rate Hike

For the four trading days covered in this report, the Dow gained 630 points to close at 32,529, the S&P 500 rose 111 points to settle at 4,072, while the tech-heavy Nasdaq climbed 328 points to close at 12,162. In Canada, the TSX added 474 points to end at 19,457.

Strategy

The Fed hiked rates in line with expectations, while the U.S. economy unexpectedly contracted in 2Q

The U.S. Federal Reserve (the Fed) raised interest rates by 75bps Wednesday, the second consecutive increase of this magnitude, marking the quickest pace of rate hikes since the early 1980s when Paul Volcker chaired the central bank. The upper bound of the Fed Funds rate is currently sitting at 2.5%, in the range of what is considered neutral (i.e., not accommodative nor restrictive). In his post-meeting remarks, Jerome Powell said “another unusually large increase could be appropriate at the next meeting,” which we interpret as another 75bps move. Mr. Powell also said it would be appropriate to slow rate increases “at some point.” Whether the Fed dials back the pace of rate hikes will largely depend on the upcoming two months of CPI and labour market data due before the next FOMC meeting. If inflation shows signs of moderating or labour market conditions deteriorate significantly, the Fed may opt for a smaller 50bps move in September. The Fed Chair also said that officials would set policy on a meeting-by-meeting basis and offer little forward guidance. This is likely because inflation remains a significant source of uncertainty which has – as recently as the June meeting – caused the Fed to renege on its forward guidance when it hiked by 75bps instead of 50bps. Mr. Powell maintained that the U.S. economy remains strong and is not amidst a recession, citing the excessively tight jobs market as evidence. That said, the chairman acknowledged that some deliberate cooling of economic activity may be required to allow the supply side of the ledger to catch up, which may lead to some softening in labour market conditions.

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: July 29, 2022

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