Market Week in Review: Fed rates, GDP and technical recessions: What does it mean for investors?
On this week's Market Week in Review episode, Research Analyst Emily Zhao interviews Investment Strategist Alexander Cousley on Fed announcements, U.S. GDP, recession realities, European natural-gas woes, and China stimulus. It's a lot to cover, so let's get to it.
Neutral interest rate? Are we there yet?
The U.S. Federal Reserve (the Fed) raised rates this week by 75 basis points, largely in line with what the market anticipated. "A couple of weeks ago," said Cousley, the market was pricing in an increase of 100 basis points. The Fed kind of pushed the market back to 75, and now they delivered on that." Cousley noted that the Fed had reached the neutral interest rate (the level at which policy interest rates would neither stimulate nor restrict an economy). "We think there are probably still more rate rises to come, though," said Cousley. "Inflation is still well above what the Fed would like to see."
Q2 U.S. GDP impacts
U.S. gross domestic product (GDP) numbers were released late in the week. "There was a lot of chatter about the fact that the U.S. is now in a technical recession," noted Cousley, as there have been two consecutive quarters of negative GDP growth. Cousley stated that Russell Investments does not think the current situation will be considered a recession by the National Bureau of Economic Research. This group defines recessions because that group takes into account a much bigger range of indicators than just GDP. Cousley observed that payroll is typically “a big indicator” and payrolls have recently been “quite strong."
Cousley said: "If you look at what happened through Q2—the big driver of that negative print was inventory. So, companies ran down their inventories, which was a drag on GDP growth. And the other part we saw was that we're starting to see weakness in those rate-sensitive parts of the economy—softer investments, softer residential investments. You should see weaker signs from those things as interest rates start to rise."
On Q2 consumer activity, Cousley said: "On the aggregate, it looked all right, all things considered." He explained that markets have been waiting for a shift from goods consumption to services consumption, which came through quite strongly in Q2.
Natural gas, Germany, and the European economy
Emily Zhao moved to the topic of natural gas in Europe, where we've seen another jump in prices. Cousley pointed toward Russian restrictions and noted that Germany is the most impacted. "German gas supplies are heavily influenced by what is coming through from Russia, but they're trying to diversify away from that and that will be a longer-term thematic." He noted that emergency rationing is not off the table for Germany, saying, "They haven't reached that point yet, but the impact this is having on the European economy is quite severe."
Update on China stimulus and restrictions
Finally, the conversation shifted to the recent meeting of the Chinese Politburo regarding the economy. Cousley called out two key points: "The first is that they aren't ready yet to do the big bazooka of stimulus." Cousley noted that the Politburo is fine-tuning existing stimulus measures and easing restrictions on big tech companies like Alibaba and Tencent.
Cousley also mentioned the People's Bank of China, exploring funding mechanisms to assist Chinese property developers. "Some of them have just run out of money, and they don't have the funds to finish the projects," said Cousley. A total of US$180 billion could be made available from the People's Bank of China and smaller state banks. Cousley observed: "It's probably not yet fully enough to get all the way through, but it is an encouraging development."
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
This material is not an offer, solicitation or recommendation to purchase any security.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.
The Russell logo is a trademark and service mark of Russell Investments.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.