All eyes turn to the FOMC this week who have signalled their intention to raise rates by another jumbo 75bps. This has been well telegraphed by recent comments from Fed officials, though we now know that forward guidance has pretty much bitten the dust as a policy tool for central bankers.

In these uncertain times, it appears it is way too hazardous to tell markets ahead of time what policymakers will do in a few weeks. [See last week’s ECB Meeting / the previous FOMC meeting etc]. We are now all data dependent and with that comes the potential for even more volatility. Some Wall Street strategists are even saying that we should now ignore comments from central bankers. How can you position for what a prominent official says when they can change their views at the drop of a hat?

Friday’s widely followed PMI surveys painted a very grim picture in the US (and Europe too). Although the ISM data is more popular, the services PMI dropped into contraction territory while the manufacturing figures weren’t far behind. These come on the back of a big fall in the July US Philadelphia Fed survey and a rise in initial jobless claims last week as well.  

Speculation of a massive 100bp Fed rate hike this week, especially hot after the consensus beating latest CPI data, has eased. Indeed, two of the most hawkish FOMC members recently stated that they were not strongly convinced, and their base case was for a 75bp rate rise. Most economists expect smaller half point hikes after the summer in September and November. Remember that numerous Fed members have said the Fed is prepared to sacrifice near-term growth to get inflation back down over the medium term.

We’ll find out more about recession worries when US Q2 GDP is released the day after the FOMC meeting. The economy contracted last quarter and another negative print would meet the definition of a technical recession. Wall Street economists expect a positive number, while in contrast, the Atlanta Fed GDP Now model points to a 1.6% decline.

The ECB’s surprise 50bp rate hike didn’t propel the single currency a lot higher, though the weak PMI data the following day didn’t put the death knell in either. But European bond yields, particularly in Germany, plunged on Friday on the back of the weak economy and an unconvincing ECB. Combined with ongoing energy risks and Italian political uncertainty, is it only a matter of time before we see parity again in EUR/USD? Punchy inflation data and a small increase in eurozone GDP on Friday may offer some support in the meantime.  

Major risk events of the week

25 July 2022, Monday:

-German IFO Business Survey: Economists expect a headline print of 90.5 in July from the prior 92.3. Rising energy costs are likely to remain a big concern for companies, especially into winter. Ongoing supply chain issues may also dampen the demand outlook.

27 July 2022, Wednesday:

–Australia CPI: Analysts are forecasting a 1.7% rise in the June quarter. Following on from the 2.1% print in the March quarter, they expect the annual pace will rise to 6.1% from 5.1%. Housing, food and fuel are driving the advance, but widespread price pressures continue to push up core inflation.

–US Durable Goods: The market median estimate is -0.5% in June, down from 0.8% in the prior month. Analysts say that rising interest rates and tighter financial conditions may slow momentum. Deteriorating sentiment may act as an additional headwind.

–FOMC Meeting: Money markets expect another 75bp hike taking the Fed Funds rate to 2.375%. Traders will be on the look out for near-term guidance around a September hike. An update on QT and the speed of balance reduction might also be a focus. Risks around inflation and economic activity are central to this.  

28 July 2022, Thursday:

-US GDP: Consensus sees real GDP expanding by 0.5% following the 1.6% annualised contraction in the first quarter. Economists cite consumption weakness, tightening financial conditions and declining real incomes as factors clouding the outlook.

29 July 2022, Friday:

-Eurozone GDP: Growth is expected to slow sharply after the data surprised to the upside in the first quarter. The data is forecast at 0.2% q/q and 3.4% y/y from 0.6% and 5.4% previously. Higher energy prices are likely to hurt activity, though ongoing labour market strength might support consumption.

–Eurozone CPI: The market median estimate is for an increase in the headline rate to 8.8% from June’s 8.6%. The core is estimated to rise 4% from 3.7%. Analysts say that government interventions on energy may see some temporary relief, but they expect inflation to remain above 8% through to year-end.

–US Core PCE: Consensus estimates a print of 0.5% in June, up from 0.3% in the prior month. The Fed’s favoured inflation gauge is consolidating at high levels. But some analysts forecast a gradual fall as price pressures ease in the second half of 2022.