Market Report - 27/07/2023
Federal Reserve and ECB hike rates as expected; US GDP surprise sees the Dollar rally
The Federal Reserve last night raised interest rates by 25 bps, taking them to 5.50%. The decision to increase rates by a quarter of a percent took U.S interest rates to a 22-year high.
This comes after the Fed indicated a pause in further hiking last month as US inflation declined for 12 straight months, now running at 3% (down from over 9% in June 2022) although some Fed officials have expressed fears that recent falls in the pace of price rises may be temporary.
The Federal Reserve has now raised rates from zero to 5.50% in an attempt to cool the economy and bring prices down. Though the interest rate hiking cycle has impacted a fairly robust U.S economy, unemployment remained notably close to a record low. Despite inflation continuing to cool, Jerome Powell has not ruled out any further hikes in the near future, with the next meeting due in September.
The knock-on effect and impact of rising rates are making it more difficult for Americans to obtain credit. According to the New York Fed, in June the rejection rate for credit applicants increased to 21.8%, the highest level since June 2018.
In other news, The US economy grew at an annualised rate of 2.4% in April-June, the equivalent of quarterly growth of 0.6%. That’s an acceleration on the 2% annualised growth recorded in January-March. Economists had forecast a GDP slowdown to 1.8% but today’s figures exceed expectations for growth in the second quarter. Whilst this is a positive sign for the US economy, some economists are suggesting that high demand will also begin to re-enforce the inflationary pressures.
In the Eurozone, the ECB also raised rates this afternoon to the highest level to date, as it attempts to cool inflationary pressures. At the meeting today, the European Central Bank hiked interest rates by 25-basis points, alongside the ECB deposit rate.
ECB Chief Christine Lagarde told reporters that inflation could still be pushed up by rising costs of energy again, all potentially related to Russia’s withdrawal from the Black sea grain initiative. She also added that the adverse weather conditions caused by the “unfolding climate crisis” could be set to impact food prices more than initially projected.
Attention now turns to an influx of data from the Eurozone tomorrow, with both France and Germany set to report their CPI data, whilst Spain and Germany’s GDP data is released.