Market Overview

10 August 2022

Fed May Slow Down Monetary Tightening amid Falling Inflation in July

The recent Non-Farm Payrolls report was unexpectedly positive as the U.S. economy created 471,000 new jobs in July compared to 250,000 expected by analysts. The unemployment level dropped to 3.5% from 3.6% a month earlier, or to a minimum since the pre-pandemic levels in February 2020. Hourly average wages rose by 5.2% year-on-year and 0.5% compared to June figures vs expected 4.9% and 0.3% respectively. The U.S. Dollar index (DXY) rose above 106 points.

Investors’ optimism was not only fueled by the strong labour market in the United States, but also by the U.S. government and Federal Reserve’s (Fed) conviction that this fact would not allow them to consider the last two consecutive Gross Domestic Product (GDP) negative quarters as a recession. Now it seems that both Treasury Secretary Janet Yellen and Fed’s Chairman Jerome Powell were right. Now 61% of investors seem to be convinced that the Fed may tighten interest rates by 3.25% while  only 39% think the monetary watchdog could increase rates by 3.00% on its September meeting. The odds were 87% for an interest rate increase of 3.00% on Friday morning to 13% odds that interest rates would be raised to 3.25% in September. Also, 19% of investors believed a 4.00% interest rate hike by the end of 2022 is more likely.

However, it may be too premature to predict such sharp moves now. Even if there is no recession at the moment, one could hit the floor in 2023 and a sharp interest rate increase would only provide more incentives for it. So, is the rapid rise of the interest rates really necessary if it casts down the American GDP? The Fed’s actions this year have seemingly initiated a slowdown of the inflation process and the Consumer Price index (CPI) readings had to be closely monitored to adjust the monetary tightening process when needed.

These considerations make the release of the CPI on August 10 even more vital. It is forecasted to slow down to 8.7% from 9.1% in June. This may mean that the inflation peak has been surpassed and it may slow down further.

The interest rates hike is greatly affecting consumer demands and could hardly affect costs related to high fuel and other commodity prices. But, oil prices, food, and commodity prices are currently seen to be decreasing amid risks of an upcoming recession. So, could it be worthwhile to add more risks of a recession by picking up interest rate above the previously planned level? If such a message is sent out by the Fed after the CPI readings, it could confirm inflation is slowing down and the U.S. Dollar may lose momentum, and the DXY index may drop to 105.0-105.5 points.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Mark Goichmann
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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