Week ahead: Fed to hike 100bps into a recession?

The Federal Reserve meets this week to announce another bumper interest rate hike – the only question left for markets is whether it will be a 75bps move or 100bps. The advanced Q2 GDP reading will tell us whether the US is entering a technical recession and PCE inflation numbers will round out a big week for US data. Meanwhile earnings season on Wall Street hits full speed with tech giants like Apple, Alphabet and Meta and industrials like Boeing, Ford and Caterpillar. 

Federal Reserve 

Markets expect the Federal Open Market Committee (FOMC) to deliver another bumper rate hike after its meeting on July 26-27. The question is how big: markets expect a second 75bps but price a roughly one-in-three chance of a full percentage point increase in the Fed funds rate. The Fed will need to balance competing influences on policy thinking. Whilst nominal inflation continues to rise to 40-year highs and exceed expectations, inflation expectations and commodity prices have somewhat rolled over in the last month. And whilst the CPI inflation reading keeps trending higher, core PCE inflation has eased back. 

US GDP 

The advanced reading of US second quarter GDP growth is due Thursday. The Atlanta Fed’s GDPNow model estimate for real GDP growth in the second quarter of 2022 is -1.6 percent on July 19th, down from -1.5 percent on July 15th. If it were to do, it could signal the US economy has entered a technical recession, after first quarter GDP declined by 1.4% on an annualised basis.  

PCE Inflation 

The Fed’s preferred gauge of inflation, the core personal consumption expenditures (PCE) index, is released on Friday. Figures released at the end of June showed PCE inflation excluding food and energy fell to 4.7% year on year in May, down from 4.9% in April, with the core inflation reading having peaked at 5.3% in February. Headline PCE inflation was steady at 6.3% in May, down from a March peak of 6.6%.  

Megacap Earnings 

Earnings season hits full speed this week as the largest cap companies and a slew of Dow industrials post quarterly financials. So far about four in five companies on the S&P 500 that have reported topped analyst expectations. Thus far earnings have not been as bad as feared and that is allowing investors to see the glass half full after weeks of worry. Megcap tech is the highlight with Apple, Amazon, Alphabet, Meta and Microsoft on the tape. Meanwhile Dow components McDonald’s, Coca-Cola, 3M, Intel, Procter & Gamble, Chevron and Boeing are among the large cap companies delivering earnings updates. 

Earnings calendar 

Economic calendar (BST)