With the third and at the same time strongest interest rate hike in almost 30 years, U.S. Federal Reserve Chairman Jerome Powell is sending a clear signal in the fight against rampant inflation. Following the increase of 75 basis points, the key interest rate is now quoted within a range of 1.5-1.75%. According to the Fed's new projections, the key rate will rise to 3.4% by the end of 2022, which is significantly higher than previously projected. At the end of 2023, the fed funds rate is then expected to rise to 3.8%. This forecast is also significantly higher than the previous one. At the same time, the Fed is now assuming significantly weaker economic growth. The outlook is now for GDP growth of +1.7% in the current year, compared with the previously anticipated +2.8%. At the same time, the inflation rate will average +5.2% this year. Overall, the U.S. central bank is faced with a balancing act. Rapid and sharp interest rate hikes are intended to curb inflation, but they can also plunge the economy into recession. Fears of an economic slump are now likely to increase on the capital markets. Moreover, like other central banks, the Fed cannot influence certain inflation drivers, such as energy and commodity prices or the dislocations in global supply chains.
On Wall Street, the reactions to the Fed's interest rate decision were positive, because the Fed's interest rate move was expected in this magnitude and strengthens confidence in the central bank to get inflation under control. After five consecutive days of losses, the Dow Jones Industrial closed +1.0% higher at 30,668.53 points. The S&P 500 rose even more strongly by +1.46% to 3,789.99 points and on the Nasdaq technology exchange, the indices even posted a daily gain of around +2.5%. At the same time, on the US bond market, the yield of ten-year government bonds fell back to 3.31%, remains at an elevated level, but below the eleven-year high reached in the first half of the week.
In Tokyo, the Nikkei 225 index followed the positive templates from overseas and traded around +0.7% higher.
ECB President Christine Lagarde announced yesterday at an "emergency meeting" that she would create a new instrument to prevent fragmentation in the euro area – i.e. an uneven burden on highly indebted euro countries as a result of the turnaround in interest rates – and also make flexible use of funds from the Corona Emergency Purchase Program (PEPP), which expired at the end of March. This was the ECB's response to the sharp rise in capital market interest rates in southern European countries in recent days, which fueled fears of a renewed debt crisis in Europe. The yield on ten-year Italian government bonds, for example, exceeded 4% for the first time since 2014 and was thus around twice as high as at the end of March.
The Swiss National Bank could well react to the changed environment today at 09:30 (CET). On the one hand, the SNB could send a signal with a monetary policy signal even before the ECB's interest rate turnaround in July and demonstrate its independence. Moreover, the SNB would practically be forced to hold an extraordinary meeting in July if it were to follow the ECB's lead and not want to expose itself to the accusation of being "behind the curve". Furthermore, inflation has also risen massively in Switzerland – in May, the inflation rate reached +2.9%. On the other hand, the ever-present danger of an appreciation of the Swiss franc could stand in the way of the SNB. The majority of analysts assume that the SNB will not announce any change in its monetary policy today. However, the press conference should certainly be followed closely.
The Munich-based economic research institute Ifo expects weaker economic growth in the current year. According to the latest forecast, German GDP is expected to grow +2.5% this year, compared with the previous estimate of +3.1%. At the same time, the institute anticipates significantly stronger inflation of +6.8% (previously +5.1%). However, the situation is expected to ease as early as the second half of the year. According to Ifo, raw material prices should gradually decline and global supply bottlenecks ease. For 2023, Germany is expected to achieve significantly stronger economic growth of +3.7% with a lower inflation rate of +3.3%.
|09:30||SZ||SNB Monetary Policy decision & press conference||-0.75%|
|10:00||IT||Consumer Prices (May, y/y)||+7.3%|
|13:00||UK||Bank of England Monetary Policy announcement||+1.0%|
|14.30||US||Building Permits (May, m/m)||-3.0%|
|14:30||US||Housing Starts (May, m/m)||-0.2%|
|14:30||US||Initial Jobless Claims (weekly)||229,000|
|14:30||US||Philly Fed Manufacturing (June)||+2.5|
|SZ||SIG||Capital Markets Day|
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Source: LGT Bank (Switzerland) Ltd.
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