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."