{"id":7231,"date":"2023-07-31T13:21:21","date_gmt":"2023-07-31T19:21:21","guid":{"rendered":"https:\/\/www.keystonefinancial.com\/?post_type=oi_article&p=7231"},"modified":"2023-07-31T14:06:02","modified_gmt":"2023-07-31T20:06:02","slug":"market-commentary-august-1-2023","status":"publish","type":"oi_article","link":"https:\/\/www.keystonefinancial.com\/articles\/market-commentary-august-1-2023","title":{"rendered":"Market Commentary | August 1, 2023"},"content":{"rendered":"\n
Central bank palooza!<\/p>\n\n\n\n
While music lovers attended concerts and festivals across the United States, central banks had a lollapalooza of their own. The U.S. Federal Reserve (Fed) led things off last Wednesday, followed by the European Central Bank (ECB) on Thursday, and the Bank of Japan (BOJ) on Friday. Here\u2019s what happened:<\/p>\n\n\n\n
The Fed<\/strong> continued to play a familiar tune at July\u2019s Federal Open Market Committee (FOMC) meeting, raising the effective federal funds rate from 5.08 percent to 5.33 percent. Fed Chair Jerome Powell stated, \u201cInflation remains well above our longer-run goal of 2 percent\u2026Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.\u201d<\/p>\n\n\n\n In addition to raising rates, the Fed is engaged in quantitative tightening (QT) \u2013 selling assets, or letting them mature, to reduce the Fed\u2019s balance sheet. Like rate hikes, QT is intended to slow economic activity and the pace of inflation. Currently, the Fed is reducing its balance sheet by about $60 billion a month.<\/p>\n\n\n\n The ECB<\/strong> was singing the Fed\u2019s tune. It lifted rates from 3.50 percent to 3.75 percent, reported CNBC. In the European Union, the inflation rate was 5.5 percent in June, down from a high of 8.6 percent last summer. Prices are rising at the slowest pace in Luxembourg (1.0 percent, annualized) and the fastest in Hungary (19.9 percent, annualized).<\/p>\n\n\n\n The BOJ<\/strong> sent a shiver through markets when it unexpectedly changed its yield curve policy, while leaving its short-term policy interest rate unchanged. For years, Japan\u2019s central bank has kept rates very low to encourage spending and investment. The change in its policy caused yields to surge higher, reported Toru Fujioka, and Sumio Ito of Bloomberg<\/em>.<\/p>\n\n\n\n The surprise move is important because, \u201cJapanese investors have spent more than $3 trillion offshore in search of higher yields. Economists warn that even a small shift to policy normalization may prompt Japanese cash to flood out of global markets and back home,\u201d reported Garfield Reynolds of Bloomberg<\/em>,<\/p>\n\n\n\n The BOJ\u2019s policy change wasn\u2019t the only surprise last week. The U.S. economy also upended expectations as its growth accelerated in the second quarter. Gross domestic product (GDP), which is the value of all goods and services produced in the U.S., grew by 2.4 percent from April through June. That was well above both first quarter growth (2.0 percent) and economists\u2019 expectations for second quarter growth (1.5 percent), reported Angela Palumbo of Barron\u2019s<\/em>. Economists who thought the July rate hike might be the Fed\u2019s rate-hiking-cycle finale headed back to their spreadsheets to reassess the data.<\/p>\n\n\n\n Last week, major U.S. stock indices finished higher, reported Barron\u2019s<\/em>. Yields on short U.S. Treasuries finished the week above 5 percent and most longer maturity Treasuries offered yields above 4 percent. The exception was the benchmark 10-year U.S. Treasury.<\/p>\n\n\n\n