Investment Institute
Weekly Market Update

Take Two: Fed hikes as US enters technical recession, IMF cuts growth estimate

  • 29 July 2022 (5 min read)

What do you need to know?

The US Federal Reserve raised the Fed Funds Rate by 75 basis points to 2.25%-2.5% last Wednesday, in a move largely expected by markets. Fed Chair Jerome Powell signalled a similar hike could follow in September. The following day official data showed the US economy had shrunk for the second quarter in a row – an indication of technical recession in many countries – with GDP down 0.9% in the second quarter (Q2) after a 1.6% drop in Q1. Ahead of the release, Powell had cast some doubt on how representative of conditions the GDP numbers might be – and stressed that the Fed was still “highly attentive” to inflation risks.

 

Around the world

The International Monetary Fund (IMF) cut its global growth forecast to 3.2% this year and 2.9% next year, 0.4 and 0.7 percentage points respectively lower than its last assessment in April. Inflation, a slowdown in China and the war in Ukraine have resulted in “an increasingly gloomy and uncertain outlook”, it said. The IMF also raised the possibility of an even sharper slowdown, if certain risks emerge, including a full shutdown of Russian gas flows to Europe. Under this “plausible alternative scenario”, global growth could decelerate to around 2.6% this year and 2% next, it warned.

 

Figure in focus: 0.7%

Eurozone GDP grew 0.7% in Q2, as the bloc’s economy held up better than expected in the face of soaring inflation and the impact of Russia’s invasion of Ukraine. France avoided recession after beating forecasts to report 0.5% growth in Q2 following a 0.2% contraction in the previous quarter. The German economy stalled, recording 0% growth in Q2. Meanwhile, inflation in the Eurozone rose to a new record high of 8.9% in July, from 8.6% in June, with energy prices continuing to rise. Last week Russia further reduced the gas flow through the Nord Stream 1 pipeline, giving rise to fresh concerns over a looming energy crisis.

 

Words of wisdom: Dogger Bank

The name given to a shallow part of the North Sea that will house what is expected to be the world’s largest offshore windfarm. Work began last week on the project which will see 277 turbines installed about 100 miles off the UK coast near Yorkshire. Completion is scheduled for 2026, when the site should be able to generate enough power for six million homes. The area likely gets its name from Dutch trawlers known as doggers that used to operate in the fertile fishing grounds.

 

What’s coming up?

Eurozone unemployment numbers covering June arrive on Monday while on Tuesday the Reserve Bank of Australia meets to decide on interest rates – at its July meeting, it upped the cash rate by 50 basis points (bps) to 1.35%. A spate of final Purchasing Managers’ Indices for July land on Wednesday, including those covering Japan, the Eurozone and US. After hiking rates by 25bps to 1.25% in June, the Bank of England once again convenes on Thursday to decide on monetary policy. On Friday the US updates the market with its latest job numbers.

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