Market update – July 2022

Article written in August 2022

💡 What drove the markets in July 2022? 💡

🎯 1. US markets: inflation higher than expected and second 0.75% rate hike: 📈

Interestingly enough, while the scenario that played out in July is very similar to the one that played out in June – inflation at its highest point, “exceptional” interest rate hike of 0.75 point, etc – the markets have reacted very differently.

Inflation in June in the US peaked at 9.1% (CPI data released on July 13th), above expectations, and above May inflation at 8.5% (released in June). As a consequence, the Fed triggered a second 0.75 point hike for the US interest rates.

It’s tempting to think “nothing changed, actually it even got worse”. Yet, counterintuitively, the US markets have been going up from there until today (August 5th).

There can be two reasons for this:

a) In June, the markets were surprised and disappointed in May’s inflation reading (proving wrong the belief that inflation peaked in March), and feared a steep increase in the interest rates.
In July, the markets were expecting the inflation to be high, and expecting the rate hike to be high as well.

b) Markets are forward-looking.
And what happens after June’s inflation? July’s inflation, which should be quite lower because the energy prices have been going down. Hence, positive reaction from the markets.

🎯 2. Oil is going down, what’s happening? 📉

$OIL is now trading below $90, tremendously lower than the peak above $120 that we witnessed in June.

What is driving this decline?

a) Demand is expected to be lower, because of:
– Recession fears
– China lockdowns
– Less activity after the summer

b) The US are getting closer to the OPEC:
The US have been continuously asking the OPEC to increase their oil output, and have approved this week the sale of weapons (THAAD missiles) to Saudi Arabia and the UAE for $5 billion. In exchange, the OPEC has committed to increase their oil output by 100,000 barrels per day. It’s not much (a 0.3% increase of the overall OPEC production), but it’s an important symbol.

The decrease in oil prices is positive news as far as inflation is concerned, and thus positive for the markets.

🎯 3. What to expect next? 🎯

✅ CPI data for July will be released next Wednesday, on August 10th. If ever the inflation numbers are higher than July’s numbers, it should be quite negative for the markets; but most likely the number will be lower.

✅ FOMC meeting minutes on Wednesday 17th August, which will let us know about the next rate hike.

✅ Overall, stick to your strategy and to fundamentals, always learn and improve, and you will be fine!

Thank you and trade safe~

Nico