The US Federal Reserve’s highly anticipated July meeting has commenced, and investors are eagerly awaiting the rate hike decision announcement, scheduled to be revealed tomorrow, along with a crucial speech from Chair Jerome Powell.
This week is of significant importance for the global markets, as not only the US Federal Reserve but also other major central banks, including the European Central Bank and the Bank of Japan, are expected to unveil their policy changes. Additionally, the tech industry will be closely monitored, as investors await earnings reports from tech giants Amazon (NASDAQ:AMZN) and Meta Platforms (NASDAQ:META). Meta’s stock has been on a remarkable upward trajectory, more than doubling in value this year, and its earnings report will be crucial in sustaining the current rally.
Following the Fed’s June meeting, US stocks experienced a slight decline, despite the central bank’s decision to pause rate hikes after implementing 10 consecutive increases, which elevated interest rates to the highest level since 2007, ranging between 5.00% to 5.25%.
The Federal Reserve’s rate hike actions in 2022 were among the factors that triggered a significant crash in US stocks. However, 2023 saw a resurgence in the market, with the Nasdaq-100 (QQQ) recording an impressive 32% surge in the first half of the year, marking its best performance in four decades.
As the outcome of the Fed’s July meeting approaches, the stock market has been experiencing an 11-day consecutive upward run. The key question now is whether Powell will once again play the role of a party pooper for the bullish investors, as he has been doing since the rate hike cycle began in March 2022.
The sentiment among traders is overwhelmingly in favor of a 25 basis points rate hike in July, with the CME FedWatch tool indicating an almost 99% certainty. The dot plot projection after the June meeting hinted at another 50-basis point rate hike in 2023. Powell’s recent statements at the central banker panel in Sintra, Portugal, suggested that consecutive rate hikes are not off the table.
The minutes from the June meeting further solidified the moderately hawkish stance among most Fed members toward rate hikes. Powell’s recognition of stronger-than-expected growth, a tight labor market, and higher inflation reinforced this hawkish sentiment.
However, several economic indicators since the June meeting have been pointing toward a slowdown in growth and a decline in inflation. The June consumer price index (CPI) recorded a significant decrease of 6.1 percentage points compared to the same month in 2022, settling at 3%, the lowest reading since March 2021. Additionally, the June nonfarm payroll (NFP) data showed the lowest job additions for the year, falling short of analysts’ expectations.
As we look ahead, the actions taken by the Federal Reserve will continue to play a crucial role in shaping the markets for the second half of the year. Many traders believe that the July rate hike will likely be the last one in this tightening cycle. Powell’s tone and stance on interest rates will be closely scrutinized, especially considering the recent moderation in US inflation and the softening in the labor market.
While some market participants expect Powell to reiterate his previous position against rate cuts, others wonder if he might explore the possibility of a “soft landing” for the US economy. Overall, Powell’s comments on the future trajectory of interest rates will carry substantial weight in influencing market sentiment.
The Federal Reserve must exercise caution in its communication, given the risk of misinterpretation and its potential impact on the market. A more hawkish-than-expected stance from Powell could potentially jeopardize the impressive rally in US stocks, underscoring the need for the central bank to navigate the delicate economic conditions with precision. As investors anxiously await the Fed’s decisions and Powell’s remarks, they remain on high alert, aware of the potential market implications that could unfold in the wake of the meeting.
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