31 July 2024
If you are covering the latest news in financial markets, including tonight’s Federal Reserve interest rate decision, please find below a comment from Lindsay James, investment strategist at Quilter Investors:
“In what is a big week for markets, not only for earnings announcements but also from central banks, the Bank of Japan has taken the financial headlines this morning for an unanticipated interest rate hike, taking it from the range of 0-0.1% up to 0.25% whilst also slashing its bond buying programme. This signals confidence from the BoJ that inflation is finally returning to the economy in a sustainable way, with the latest core inflation reading at 2.6% with real wage growth expected to turn positive in the coming months. Although economic growth has been disappointing, due in part to the extreme weakness of the yen which has made imported goods more expensive for consumers, strong growth from exports has provided some support to the economy.
“This unexpected rise in interest rates from the traditionally cautious BoJ has seen the yen strengthen and the equity market rise, an unconventional response to an unconventional situation where in recent weeks, persistent currency weakness has deterred international investors. With the Federal Reserve likely to be cutting rates at the September meeting, the differential between US and Japanese policy rates will narrow further, but ultimately remains wide. However, the risk is increasing that currency moves could begin to dominate investment opportunities, with the dollar-yen unwinding potentially a further headwind for US equities.
“The next page of the story will come clear tonight when the Federal Reserve is expected to hold rates at 5.25% but may well signal a move is on the cards for September, by which time two further inflation prints will have been received. Strong GDP growth has dominated signs of stress in the labour market in recent weeks, whilst the fact that core inflation remains at 3.3% will likely see rates remaining on pause.
“With investor attention this week equally on earnings, where numerous companies have now signalled consumers are under pressure, central banks are now entering the final approach ahead of an expected soft landing. This is typically a period of lumps and bumps, but investors can still be reassured that with growth ultimately on a slowing but still solid trajectory in the US, the Federal Reserve have a little more leeway to be patient.”
