Will the Federal Reserve surprise the markets next week?
Does the Fed have the chance to surprise the markets next week?
The Federal Reserve is expected to raise interest rates by 0.75 percentage points at its July policy meeting next week.
Officials such as Fed Governor Christopher Waller have signaled in recent weeks that the central bank will proceed with an interest rate hike of the same magnitude as last month, following a report on inflation showing consumer prices in June hit new 40-year highs.
The report also showed a sharp rise in so-called core inflation – which excludes the volatile food and energy sectors – driven by rising rents and housing costs.
This inflation data initially caused traders in the futures market to price in the possibility of a full one percentage point increase, but investors have since lowered their expectations of these levels.
Analysts and economists say the Fed is unlikely to deviate from the expected 0.75 percentage point hike. But markets could be surprised by any hint from Chairman Jay Powell about the bank’s plans for its September meeting. Futures markets are betting that the Fed’s key rate will be 3% in September, implying an interest rate hike of 0.75%.
But signs that the Fed is concerned about weakening economic data could dampen expectations. Kate Duguid
Has inflation in the euro zone accelerated further?
Eurozone inflation is expected to rise further when July data is released on Friday.
Consumer prices in the euro zone increased at an annual rate of 8.6% in June, the highest rate since the euro’s existence. Economists polled by Reuters expect price growth to pick up further to 8.8% this month, reflecting high energy and food prices in the wake of war in Ukraine .
“We expect inflation to remain undesirably elevated for some time, due to continued energy and food price pressures and pipeline pressures in the price chain,” said Christine Lagarde, President of the European Central Bank, at the bank’s meeting last week during which she announced a 0.5 percentage point hike in the key rate.
Lagarde added that higher inflationary pressures were also coming from the depreciation of the euro exchange rate and that risks to the inflation outlook “continue to be on the upside and have intensified, particularly in the short term. term”.
However, the evolution of inflation also depends on economic activity, which is deteriorating. Eurostat releases eurozone economic growth data for the second quarter on Friday, alongside flash inflation. Analysts expect quarter-over-quarter growth to have slowed to just 0.1% from a 0.6% expansion in the first three months of the year.
Looking beyond the second quarter, the broader picture is that “the eurozone economy appears materially exposed to the possibility of Europe’s gas supply being cut off entirely,” said Sandra Horsfield, an economist at Investec. While she doesn’t think that will happen, “high energy prices in themselves will act as a drag on output, as will rising policy rates.” Valentine of Rome
Will Apple’s earnings show slower growth?
Apple’s June quarter is expected to be remarkably subdued compared to a year ago.
Analysts expect the iPhone maker to generate $82.5 billion in revenue, up just 1.4% from 12 months earlier, when revenue jumped 36%.
Apple prepared investors for stagnation. In April, it predicted that supply chain headwinds and factory shutdowns in China could cost it $8 billion this quarter.
Morgan Stanley, which is generally bullish on Apple, expects revenue of $80.6 billion, which would mark the first year-over-year sales decline for the tech giant since the March 2019 quarter.
The bank said it would pay close attention to currency fluctuations due to the strengthening dollar as Apple raised prices in overseas markets. Still, he calls Apple the “best name in its class in a downturn.”
If the numbers are weak, just as recession fears escalate, investors looking ahead to the September quarter might also worry that the past two years of unchecked demand for iStuff may wane.
Where Apple might manage to surprise is with the iPhone, which still accounts for around half of all revenue. Recent data from China indicates that a smartphone recovery took hold in June after Beijing eased Covid-19 restrictions. Some analysts estimate that iPhone shipments in China last month were triple those of a year ago.
Another potential wild card is Services, the fast-growing division of App Store revenue and media subscriptions where the tech giant posts profit margins north of 70%. If a recession ends up causing hardware sales to plummet, Oprah Winfrey’s 2019 reminder of Apple’s global reach in services could reassure investors: “They’re in a billion pockets, y’all.” Patrick McGee