Oliver Jones, the asset allocation strategist at investment company, Rathbones, commented on the recent move as follows: “Policy makers resisted the temptation to follow the Bank of Canada with a shock and awe one percentage point increase, noting that recent indicators of spending and production have softened”.
He went onto say, “in fact there have been numerous signs in the last couple of months that the economic outlook is deteriorating. Consumer confidence continues to weaken and initial jobless claims have been climbing steadily since the first quarter of the year”.
Marcus Brookes, the Chief Investment Officer at Quilter Investors, said that “while markets had been expecting a rate hike, it will stoke fears that the US is nearing a recession”.
Richard Flynn, managing director at Charles Schwab UK added “the announcement from, the Fed is concerning and reflects weaknesses in the stock market and the outlook for corporate profit margins. The Fed doled out trillions of dollars’ worth of liquidity during the pandemic, boosting the economy. However, it is now aggressively raising interest rates in a bid to control inflation, meaning that liquidity has dried up. Tightening financial conditions point to a meaningful economic slowdown. The latest rate rise underscores this risk”.
One last quote and this is from Seema Shah, the Chief Strategist at Principal Global Investors, “throw in the most aggressive Fed tightening cycle since the 1980s and a recession in early 2023 is highly likely”.
Yet, earnings are looking good
Bloomberg was an interesting read this morning when it reported that many results beat earnings expectations. BNP Paribas kicked off the French bank earnings season with an upbeat tone. Standard Charter’s earnings also surpassed estimates. Next up is Nat West and analysts are expecting favourable news.
It’s worth remembering that higher interest rates for banks are favourable, with greater margins for profit. However, if rates go too high and there is an economic fallout, this will likely cause issues for banks.
On the technology front, upbeat earnings from Amazon and Apple offered good news after markets closed in the US. Amazon’s sales forecast was surprisingly positive, and it said it’s making progress on cost control, sending the share price surging. Apple expects revenue to accelerate this quarter and sees improvement in China after the lockdowns.
Will earnings deteriorate?
Clearly, not all companies are posting strong earnings. Bloomberg also reported this morning that shares in Intel plunged in the US after failing to meet expectations and cutting its full-year revenue forecast. A company called Roku (a digital media company) also saw its shares fall badly as a slowdown in advertising hit its earnings and its outlook.
The investment arena is carefully dissecting the accompanying statements to the earnings announcements for indications of what the future holds. Such statements are going to be crucial in determining investor sentiment.
I had a long chat yesterday with Hugh Gimber, a Global Market Strategist for JPMorgan. He is responsible for generating research driven analysis on the global economy and markets. He commented that if we see a raft of downgrades on earnings, the growth areas of portfolios don’t have the capacity to absorb the bad news. |