As the US Skirts a Recession, Will OPEC+ Help Ease High Prices?
As we look to the week ahead, it’s important to firstly remind ourselves of the one which just ended, as there were two key events which traders and investors should keep in mind.
Firstly, on Wednesday 27 July, the Federal Reserve announced its latest interest rate decision. For the second time in a row, the US central bank raised interest rates by 75 basis points, taking its benchmark rate to a range of 2.25% - 2.5%.
The following day, the Bureau of Economic Analysis (BEA) released GDP growth figures for Q2. For the second consecutive quarter, GDP fell, this time by 0.9%.
Despite a recession being traditionally defined as two consecutive quarters of negative growth, the BEA is reluctant to label the current situation as such. But, call it what you like, it certainly isn’t good news for the US economy.
The reason we are highlighting these announcements, is that they may have an influence on a number of assets in the weeks ahead:
- Gold closed Thursday’s session with a gain of 1.2% following the latest GDP announcement, and might start to attract more attention from buyers looking to hedge against a potential downturn.
- Crude oil has spent the majority of the last five months above $100 a barrel, but might start to lose some of its appeal, as oil demand has a strong positive correlation with the economy.
- The US dollar has benefitted recently from uncertainty and aggressive interest rate hikes, but has started to show signs of cooling, as many forecasters expect the Fed to take a more relaxed approach to monetary policy for the remainder of the year.
- And, after a difficult start to 2022, stock markets could have more joy in the months ahead. Following expectations that interest rate rises will slow for the remainder of the year, Wall Street rallied on Wednesday, Thursday and Friday – with global stock markets recording their best month of the year in July.
Now, let’s turn our attention to the week ahead, and some of the key events that traders and investors should look out for.
Big Oil’s Big Profits to Continue?
On Thursday, amidst persistently high oil and gas prices, energy giant Shell posted blockbuster results, smashing its quarterly profit record for the second quarter running. It also announced a whopping $6 billion share buyback programme.
Tuesday will see the turn of competitor BP to announce their Q2 results, and it’s likely we will see further profit records broken.
The following day, 3 August, oil traders will want to pay close attention to the meeting of the Organisation of Petroleum Exporting Countries and allies (OPEC+). Whilst many world leaders will be hoping for the group to boost oil output to ease prices, reports suggest that supply is likely to remain steady, although a modest increase may be discussed.
More Interest Rate Hikes in the Pipeline
Following on from the Fed’s announcement last week, the Bank of England’s (BoE) Monetary Policy Committee will announce their latest interest rate decision on Thursday 4 August. It looks certain that they will choose to raise rates for the sixth consecutive meeting, after being the first major central bank to do so in December 2021.
Although the market consensus appears to expect an increase of 25 basis points, a more aggressive hike of 50 basis points cannot be ruled out. So anybody trading currency pairs involving the GBP or UK stocks will want to pay close attention to this announcement and should be braced for increased volatility around its release.
As usual, the first Friday of the month sees the US announce its unemployment rate and nonfarm payrolls, which is always a big event in the economic calendar. However, given last week’s disappointing GDP figures, August’s employment data takes on increased significance.
Remember earlier we said that, despite meeting the requirements for the dictionary definition of recession, the BEA were reluctant to label it as such? Well, one of the arguments against classifying the current downturn as a recession is that, despite negative economic growth, US employment data has been fairly positive this year.
July’s data revealed that private-sector employment was higher than before the pandemic, and the nonfarm payroll saw more than 372,000 jobs added in June, far higher than the 268,000 that had been anticipated.
So, traders and investors should pay close attention here – because, if employment data comes in lower than expected, the economic outlook for the US could suddenly look a lot worse, and the BEA may be forced to re-evaluate their view on whether or not the US is in recession.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.