The Fed raises rates by 25 bps, keeping the bias toward further action. The ECB intends to raise rates until the fall

The US Central Bank raised rates by 25 bps to 5.50%, the highest in 22 years. But the market was fully ready for such a decision, so there were no surprises here. The main focus of investors was directed to the FOMC press conference.

The main theses of the Fed Chairman Jerome Powell’s speech:

• Core inflation remains high (current Core CPI 4.8%);
• The FOMC is committed to returning inflation to the 2.0% target to achieve price stability (current CPI 3.0%);
• Inflation is not projected to reach the 2.0% target until 2025;
• Another rate hike at the next meeting is possible, but it will depend on incoming economic data;
• A rate cut this year is not the baseline scenario;
• The FOMC is no longer forecasting a recession in the US;
• Asset reduction (quantitative tightening – QT) will continue.

According to the FedWatch Tool, there is only a 22% chance that the US Fed will raise interest rates in September. For investors, this is a green flag for further growth of stock indices.

Another drop in Germany’s leading indicator, the IFO index, confirms that the economy has returned to a downtrend. According to economists, the German economy is stuck in the zone between stagnation and recession (so-called “slow recession”) and is in dire need of a new reform program. China’s weaker-than-expected opening, the looming recession in the US and Europe, and the continued tightening of monetary policy seem to be taking their toll on German company sentiment. Germany is likely to face a longer period of subdued growth – the current valuation component is as low as it was at the end of 2020, with both the current indicators and the expectations component down.

The ECB will hold a monetary policy meeting today. Analysts expect the ECB to raise rates by 0.25%. However, the focus will be on the Central Bank’s plans for September, and markets are divided on whether there will be another rate hike or whether the ECB will hit the pause button. ECB President Christine Lagarde is likely to reiterate that future decisions will be based on incoming economic data. Last time the ECB said that inflation is projected to stay too high for too long, so given the strong labor market, there is room for the ECB to raise rates further.

The Energy Information Administration (EIA) reported yesterday a 600,000 barrel drop in US crude oil inventories. Oil prices rose in Asian trading on Thursday, recovering most of the previous session’s losses. Analysts believe that there are concerns in the oil market about the reliability of oil supplies in sufficient volume. Oil prices are therefore expected to rise in the coming months, following tensions in global markets after supply cuts by the world’s largest producers.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) was down by 0.04%, China’s FTSE China A50 (CHA50) decreased by 0.04%, Hong Kong’s Hang Seng (HK50) lost 0.36% on the day, while Australia’s S&P/ASX  00 (AU200) was positive by 0.85% on Wednesday. But most Asian stocks returned to the upside on Thursday as interest in risk-oriented markets was boosted by the Federal Reserve downplaying the likelihood of a US recession this year.

While aggressive interest rate hikes in the US appear to be nearing an end, Japan’s central bank faces a tough decision tomorrow on whether to take another step towards phasing out its controversial yield control program. Although inflation has been holding above its 2% target for more than a year, BOJ Governor Kazuo Ueda has vowed to keep monetary policy soft until he is confident the economy can withstand global headwinds and allow companies to continue raising wages next year. The BOJ is expected to keep the policy rate at minus 0.1% and maintain its yield curve control (YCC) targets at the two-day meeting that ends on Friday. However, the board may discuss making minor policy changes, such as widening the range of premiums around the 10-year yield target, if it feels the costs of YCC are starting to outweigh the benefits.