Global Central Banks
A lot is happening this week, but the market-moving event will be the Federal Reserve meeting on Wednesday. For the first time in 15 months, the Fed is expected to skip, not pause, but skip raising interest rates. Even though inflation remains higher than what the Fed wants, and after a big beat on the recent jobs number, a surprise hike on Wednesday is unexpected and would possibly spook markets. We’ve already seen surprise hikes from Australia and Canada last week. Our central bank is one of many central bank meetings this week. The European Central Bank is expected to raise rates on Thursday, as are Norway and Sweden. We’re also watching several African nations where central banks have been tightening. The US and Bank of Japan are the only central banks expected not to raise rates this week. We’re observing global central markets as we’ve already seen signs of economic slowdowns across the globe. Last week we got confirmation that Germany has slipped into a recession, as Europe’s largest economy has dropped its output since last year. Central bank actions have consequences, and that’s why we’re talking about it in this episode, and it is something we’re focused on today.
What Will the Fed Do?
Inflation in the United States remains elevated but is falling. We expect the inflation report that comes out on Tuesday to show a year-over-year increase in prices of 4.2%. That’s down from last month’s number of 4.9%. That’s important because, even though 4% is still high, it’s well below recent history and below the current Federal funds rate of 5.25%. If we get an inflation print of 4.2%, that puts over a percentage gap between inflation and the Fed funds rate. The Fed funds rate is the money that the Fed is lending overnight to banks and what you see in the money market. That means that investors can outpace inflation with cash. That’s a very important distinction between our current Fed funds trade and the global interest rates. However, we also see a weakness with Germany in a recession, and China recently reported that its global exports are downs by over 6%. China is the exporter to the world, so when their exports are down, that’s likely an indication of slower economic growth. Something the Fed will be looking at very closely is the US vs. the globe and that rate pause. A rate hike skip is what many market participants expect. The next Fed meeting isn’t months out; it’s next month on July 26. They get to pause and don’t have to sit there for long. Instead, they get to adjust and see where things are. Another important indicator is what the Fed will say about their quantitative tightening. During Covid, the Fed expanded its balance sheets to nearly 9 trillion dollars, providing needed liquidity for the market, in the economy. Since the beginning of 2022, they have been reducing that liquidity. We expect they will continue that to 80 billion dollars a month. However, year to date, that liquidity drain has been offset by the Treasury Department pumping liquidity into the market. Now that we’ve seen the debt ceiling raised and the Fed potentially pausing, that liquidity drain may restart. It is essential to hear what they say because the last time we had a major debt ceiling debate, in 2012, the Fed came in and provided easing. So, there’s a lot to talk about, even though the market has priced in a hundred percent of a pause. There’s still a lot for the Fed to digest. This is a big week with big news on what the Fed will do.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.