Stocks week ahead: Markets misread the Federal Reserve

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

Of course, Powell said, another “unusually large” increase may also be on the table. But Wall Street looked further than this.

What came next: Investors rejoiced at Powell’s apparent pivot. The S&P 500 edged up, its best month since November 2020, and financials improved. Mortgage rates fell below 5% for the first time since mid-April.

Now, Fed officials are trying to set the record straight. Not wanting the market to turn too fast, reversing the effects of their hard work so far, they are talking hard again.

,[We’re] That “almost nowhere happened,” San Francisco Fed Chair Mary Daly said in an interview on LinkedIn last week.

Federal Reserve Bank of Cleveland chief Loretta Meester told the Washington Post that “it would be unfair …

“We need to see really compelling evidence that inflation is going down, and I think we haven’t seen that yet,” Meester said.

As the Fed tries to kick back demand so it stops moving against limited supply — pushing up prices — it’s closely watching the labor market, which remains strong.

during job openings In June, the US economy continues to add jobs at a healthy pace. The July 1 report, released on Friday, showed a gain of 528,000 positions over the past month. The unemployment rate ticked up to 3.5%.

The news poured cold water on the theory that the Fed would dramatically change its outlook any time soon. The central bank really wants to see something weak in the job market. When there are too many open roles, wages rise sharply, which can make inflation in the economy worse.

“It’s not the news the Fed wanted to hear, and it could lead to a faster rate hike,” said Robert Frick, corporate economist at the Navy Federal Credit Union.

Ex-Fed Insider: A full-blown recession is 'almost certainly' coming

Investors are 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 predicted only 34% chance of such a steep hike in the price.

is coming: The next big data release is the Consumer Price Index, which is used to track US inflation. Economists surveyed by Refinitiv expect prices to rise 8.7% from July to July, slightly less than June. But except for volatile food and energy prices, inflation could be high.

America’s Strong Dollar Is Harming Everyone

The US dollar has depreciated this year. This is good news for American tourists traveling around Europe, but bad news for every other country in the world.

LATEST: The greenback is up more than 10% in 2022 compared to other top currencies – near its highest level in two decades – as investors worried about a global recession rush to scoop up the dollar, which has been seen as a move in turbulent times. Considered a safe haven. ,

Adding to the dollar’s appeal is the Federal Reserve’s decades-long aggressive campaign to raise interest rates to combat high inflation. This has made US investments more attractive, as they now offer higher returns.

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

See here: About half of international trade is invoiced in dollars, billing manufacturers and small businesses that rely on imported goods. Governments that need to repay their debt in dollars may also be in trouble, especially if reserves are low.

Dollar gains are hurting already vulnerable economies.

The dollar crunch in Sri Lanka contributed to the worst economic crisis in the country’s history, eventually ousting the country’s president from office last month. Pakistan’s rupee fell to a record low against the dollar in late July, pushing it to the brink of default. And Egypt – battered by rising food prices – is dealing with dwindling dollar reserves 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,” William Jackson, chief emerging market economist at Capital Economics, told me.

monday: Earnings 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; Income from Disney, Fox Corporation, Wendy’s and Bumble

Thursday: OPEC Monthly Report; US Producer Price Index for July; Earnings from Utz Brands, Warby Parker and Wheels Up

Friday: UK GDP; University of Michigan Consumer Sentiment Survey