Treasury Market Commentary –

Fed remains bullish despite looming recession

A weekly economic update from our Treasury team.

Published

29th July 2022

Category

Macro Commentary

The US central bank raised rates by a further 0.75% this week as they continue their aggressive path of policy tightening. Despite the economy tipping into a technical recession, the Fed remains entirely focussed on inflation, and are likely to continue hiking in the months ahead, though the pace and size of hikes is now likely to slow.

The committee’s view is, by front-loading hikes now, rates will not need to go as high, and it gives the option to cut rates if they need to stimulate growth further down the line.

The Bank of England meet next week, and an unprecedented rate rise of 0.50% now seems likely, though it will be very interesting to see how the vote is split. The market still expects rates to peak towards 3% early next year, with rate cuts potentially later in the year to support economic growth once inflation has fallen closer to target.

In Europe, gas supplies continue to dominate the narrative, with Russia cutting the flow again this week, further restricting the EU’s ability to build up an inventory ahead of winter. The issue is not going away and is likely to act as a drag on EU growth going forward, and in turn on the Euro.

On the exchanges, sterling has pushed up to a monthly high against the dollar, above the 1.2200 level, recovering strongly from the 2-year lows seen earlier in the month, as the dollar falls back on slower rate hike expectations from the Fed. GBP/EUR has nudged higher on the weaker outlook for the European economy but is so far lacking the momentum to challenge 1.2000.

GBP/USD – 1-year chart

Week Ahead

Date

Release

Last

Expected*

1/8/22

UK S&P/CIPS Manufacturing PMI

52.2

n/a

2/8/22

UK Nationwide House Pr. YoY

10.7%

11.6%

3/8/22

UK S&P/CIPS Services PMI

53.3

n/a

3/8/22

UK S&P/CIPS Composite PMI

52.8

n/a

4/8/22

UK Bank of England Bank Rate

1.25%

1.75%

5/8/22

US Change in Nonfarm Payrolls

372k

250k

*Bloomberg survey / Not available

Foreign Exchange

Currency

Last

Currency

Last

GBP/USD

1.2215

USD/JPY

132.80

GBP/EUR

1.1930

AUD/USD

0.7025

EUR/USD

1.0240

USD/CHF

0.9505

GBP/AED

4.4880

XAU/USD

1767

Equity Indices

Indices

Previous Close

YTD % Change

FTSE 100

7345

-0.53%

S&P

4072

-14.56%

EUROSTOXX

3652

-15.03%

UK Benchmark Rates

Swap Mid (SONIA)

 

2-year

+2.54%

5-year

+2.24%


View Arbuthnot Latham’s Private and Commercial deposit rates.

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