Stock week ahead: The market read the Federal Reserve completely wrong

“We’ve loaded these very large rate hikes and now we’re getting closer to where we need to be,” Fed Chairman Jerome Powell told reporters.

Of course, Powell said, another “unusually large” increase could also be on the table. But Wall Street saw past that.

What came next: Investors cheered Powell’s apparent pivot. The S&P 500 rose, hitting its best month since November 2020, and economic conditions eased. Mortgage rates fell below 5% for the first time since mid-April.

Now Fed officials are trying to set the record straight. They haven̵[ads1]7;t wanted the markets to change course too sharply, reversing the effects of their hard work so far, and they’ve talked tough again.

“[We’re] pretty much almost done,” San Francisco Fed President Mary Daly said in an interview on LinkedIn last week.
Loretta Mester, head of the Federal Reserve Bank of Cleveland, told the Washington Post that it “would be inappropriate … to cry victory prematurely” and risk allowing high inflation to take hold.

“We need to see really compelling evidence that inflation is moving down, and my view is that we haven’t seen that yet,” Mester said.

As the Fed tries to bring demand back down so it stops facing limited supply — pushing prices up — it is closely watching the labor market, which has remained strong.

While job openings fell in June, the US economy continues to add jobs at a healthy pace. A July blowout report released Friday showed an increase of 528,000 jobs last month. Unemployment fell to 3.5 percent.

The news poured cold water on the theory that the Fed would change its approach dramatically anytime soon. The central bank actually wants to see some weakening in the labor market. When there are too many open roles, wages rise quickly, which can make economy-wide inflation worse.

“This is not the news the Fed wanted to hear, and this is likely to cause it to push interest rates higher, faster,” said Robert Frick, corporate economist at Navy Federal Credit Union.

Ex-Fed Insider: A Full Recession Is 'Almost Certainly' Coming
Investors have bounced back: The stock market on Friday predicted a 66% chance of a three-quarter rate hike in September, according to CME’s FedWatch tool. On Thursday, the market had priced in just a 34% chance of such a high rise.

Coming up: The next major data release is the Consumer Price Index, which is used to track US inflation. Economists polled by Refinitiv expect to find that prices rose 8.7% in the year to July, down slightly from June. But excluding volatile food and energy prices, inflation may have increased.

America’s strong dollar hurts everyone else

The US dollar has been on a tear this year. That’s good news for American tourists walking around Europe, but bad news for pretty much every other country in the world.

The latest: The dollar is up more than 10% in 2022 against other top currencies – near a two-decade high – as investors worried about a global recession have rushed to the greenback, considered a safe haven in turbulent times .

Adding to the dollar’s appeal is the Federal Reserve’s aggressive campaign of rate hikes to tackle decades of high inflation. This has made American investments more attractive, as they now provide higher returns.

American travelers may rejoice that a night out in Rome that once cost $100 now costs around $80, but it’s a more complicated picture for multinationals and foreign governments.

Look here: Roughly half of international trade is invoiced in dollars, driving up bills for manufacturers and small businesses that rely on imported goods. Governments that need to repay their debt in dollars could also face problems, especially if reserves run low.

The dollar’s gains are already hurting some vulnerable economies.

A shortage of dollars in Sri Lanka contributed to the worst economic crisis in the country’s history, ultimately forcing the country’s president out of office last month. Pakistan’s rupee plunged to a record low against the dollar in late July, pushing it to the brink of default. And Egypt – hit by rising food prices – has a depleted stock of dollars and an exodus of foreign investment. All three countries have had to turn to the International Monetary Fund for help.

“It’s been a challenging environment,” said William Jackson, chief emerging markets economist at Capital Economics.


Monday: Revenue from BioNTech, Palantir, Tyson Foods, Novavax, News Corp., Take-Two Interactive and SmileDirectClub

Tuesday: Earnings from Dine Brands, Hyatt, Spirit Airlines, Coinbase, Roblox and Wynn Resorts

Wednesday: US Consumer Price Index for July; Revenue from Disney, Fox Corporation, Wendy’s and Bumble

Thursday: OPEC Monthly Report; US producer price index for July; Revenue from Utz Brands, Warby Parker and Wheels Up

Friday: UK GDP; University of Michigan Consumer Sentiment Survey

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