Wall Street's Week: Fed Rate Decision & Big Tech's Earnings

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•  Jul 23 2023
 

The trading week on Wall Street will open with the Federal Reserve's interest rate decision this Wednesday. According to Wall Street estimates, the Fed's monetary committee is expected to raise interest rates by an additional 0.25% from 5.25% to 5.5%.

The expected interest rate increase is the continuation of the central bank's monetary pressure on inflation as part of the suppression effort in an attempt to control prices in the economy. Inflation is reaching its critical and perhaps most tense test point. The chairman of the Fed, Jerome Powell, clarified that the Fed's inflation target is 2% and there can be no slowing down of increases or softening of the monetary tightening before Fed officials are sure that inflation is under their full control.

Based on past events, this is exactly the point where inflation may return and jump sharply and even reach a level of 6% and more. Such a situation, as happened in the 1970s, could lead to a sharp collapse in the markets and economic chaos. The publication of the next price index, on August 10, may be one of the most important events of the year.

Big Tech Earnings Could Set Tone for Market

The report season on Wall Street reaches a milestone with several reports from Google, Microsoft, Meta, Intel, McDonald's, Ford, Boeing and more. These are companies that to a significant extent drive the American economy and testify to an entire sector - each in their own field. The forecasts of these companies, especially in the current period of inflation and high interest rates, may dictate how trading on Wall Street will look in the coming weeks.

Industrial Production Contracts for Second Month in a Row

Surprisingly, despite the high price levels, industrial production continues to contract in June, with a monthly decrease of 0.5%, as in the previous month. The utilization of production, meanwhile, moderates to the level of 78.9% - the lowest value in almost two years, and expresses the moderation of local demands. In a certain sense, the period of exit from the corona has been exhausted. The vehicle production index leads the moderation in industrial production, losing a considerable 3.0% during the month. Still an increase of about 9.5% compared to the previous year. But it is expected that the series will continue to expand or at least maintain stability, given the high level of car prices.

Pessimism in the Stock Market: A Sign of Good Things to Come?

In the surveys of institutional and private investors it was found that they are the most "bullish" on the stock market in the last two years. According to high optimism it is less possible to identify the future return of the market compared to situations of extreme pessimism. After investors become overly pessimistic, the market usually achieves a significant excess return.

In the 15 weeks after the surveys show high pessimism, the S&P 500 achieved an average of 4.8%, compared to an average of 3.3% for all periods. When investors are very optimistic, the return achieved by the market afterwards is similar to the average return in all periods.

Will the Fed's Interest Rate Hike Lead to a Recession?

The Fed's interest rate decision this week seems like a simple decision on the face of it, but it carries with it the whole plot of monetary policy. On the one hand, inflation is clearly on a downward trend, when in the latest published index data, services inflation also recorded a decrease, which certainly reassures the Fed.

On the other hand, job demand is still very strong and represents a clear inflationary threat to the Fed. If this is not enough, in the management of monetary policy, inflation expectations in the markets are very important and these are still too high in the eyes of the Fed. Since the markets also embody an interest rate hike on Wednesday, the Fed's decision is actually easy since if the interest rate is not raised, inflation expectations may rise even more and the Fed will signal to the markets that it has lost control.

The problem with this reality is that any such additional increase may actually be unnecessary and only lead to a more acute negative effect than the Fed wants, that is to deepen the recession and a sharper increase in the unemployment rate in the future. On the other hand, if the Fed does not raise interest rates and in retrospect it turns out that it was wrong about the level of interest required to produce a slowdown, inflation could erupt again and become more stubborn, similar to what happened in the 80s of the last century.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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