By Peter Nurse
Investing.com -- The Federal Reserve hiked as expected, but uncertainty exists over its next move when the summer ends. U.S. GDP release could provide some clues, while stocks are expected to hand back some of the previous session’s gains. Meta Platforms disappointed with its quarterly results, in contrast to the record profits from the European oil giants. Here's what you need to know in financial markets on Thursday, July 28.
1. What’s next for the Fed
The Federal Reserve delivered its second straight 75 basis point rate increase on Wednesday, as widely expected, but Chairman Jerome Powell also declined to provide guidance on the size of the next rate hike, ensuring a degree of uncertainty over the rest of the summer.
Powell did indicate that the central bank could slow the pace of its rate increases if there is evidence that the 225 basis points of tightening so far this year is having an impact on the highest U.S. inflation in four decades.
This has provided some hope that the run of unusually large interest rate hikes may be coming to an end, especially given the recent evidence of slowing economic growth.
Fed Funds futures priced in a more dovish outlook shortly after the press conference, with the chances the Fed would deliver a 50-basis point hike in September, rather than a third 75 basis point increase, rising to 65%, from just under 51% on Tuesday.
However, inflation has proved to be far more tenacious than the Fed originally thought, prompting the rush to tighten monetary policy, and prices could easily remain highly elevated well into the new year.
Economic data will be key during the eight weeks until the Fed meets again, with the intervening period including two jobs reports, two inflation reports, and the Fed’s Jackson Hole symposium.
2. U.S. 2Q GDP due
With the Fed seemingly becoming more data dependent, the first release of U.S. economic growth in the second quarter, later Thursday, will be in the spotlight.
The preliminary print for second quarter gross domestic product is released at 08:30 AM ET (1230 GMT), and is expected to rise 0.5% in the three months from April through June.
However, there must be downside risk to this estimate, with the latest estimate from the Atlanta Fed’s GDPNow tracker standing at -1.2% on the quarter annualized, as of Wednesday.
Two consecutive quarters of negative GDP growth is widely seen as an indication the economy is in recession, although in the U.S. the official call is made by a panel of economists convened by the National Bureau of Economic Research, and often long after the fact.
“The NBER judges recessions based on a much broader set of data, including the labor market and underlying demand (consumption and investment),” said analysts at ABN Amro, in a note. “Taking this broader definition – and given the strength in the labor market and in consumption growth – it would be hard to conclude that the U.S. has been in a recession.”
3. Stocks set to open lower; Meta Platforms disappoints
U.S. stock markets are set to open lower Thursday, handing back some of the previous session’s strong gains on the back of relief that the Federal Reserve kept its interest rate increase to 75 basis points [see above].
By 06:00 AM ET (1000 GMT), Dow Jones futures were down 45 points, or 0.1%, S&P 500 futures were down 0.4%, and Nasdaq 100 futures were down 0.8%.
Stocks rallied strongly on Wednesday, with the blue-chip Dow Jones Industrial Average rising over 400 points, or 1.4%, while the broad-based S&P 500 gained 2.6%. The star of the show, though, was the Nasdaq Composite, which gained over 4%, with big tech stocks rebounding after their recent hammering by concerns of Fed rate hikes and inflation.
That said, it wasn’t all good news in the tech sector as Meta Platforms (NASDAQ:META), the owner of the social network Facebook, issued a gloomy forecast after the close Wednesday, recording its first-ever quarterly drop in revenue.
Results from the likes of Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Intel (NASDAQ:INTC) later Thursday will keep the sector in the spotlight.
Ford (NYSE:F) is also likely to be in focus as the auto giant reported better-than-expected second-quarter net income, reaffirmed its profit outlook for the year and said it would restore its dividend to the pre-pandemic level.
4. Oil majors reap the rewards
Soaring energy prices have created numerous problems for central banks and governments around the world, but the energy giants are now reaping the rewards.
Shell PLC (LON:SHEL) reported earlier Thursday a second-quarter profit of $11.5 billion, smashing its previous record just three months earlier, while also announcing a share buyback program of $6 billion for the current quarter.
French rival TotalEnergies (EPA:TTEF) also registered a record profit of $9.8 billion in the quarter and accelerated its buyback program, while Norway's Equinor (OL:EQNR) raised its special dividend and boosted share buybacks after a hefty second-quarter profit of $17.6 billion.
U.S. rivals Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) report on Friday, and are likely to also announce positive results.
The U.K. imposed a windfall tax on its oil majors in May, and this could become a template for more governments as they struggle to alleviate the global cost-of-living crisis.
5. Oil gains; EIA inventories drop sharply
Crude oil prices extended gains Thursday despite the hefty Fed hike as official data confirmed a substantial fall in U.S. crude inventories, easing concerns about falling demand at the largest consumer in the world.
U.S. crude oil stockpiles fell by 4.5 million barrels last week, according to Wednesday’s data from the Energy Information Administration, against expectations of a 1 million-barrel drop.
This largely matched the results from American Petroleum Institute, released Tuesday, suggesting that U.S. demand is holding up despite the high prices.
Further gains look likely, according to the head of Shell, as the tightness in supply outweighs any risks to demand.
“Where we are today, there is more upside than downside when it comes to the oil price,” Shell Chief Executive Officer Ben van Beurden said in an interview with Bloomberg TV. “Demand hasn’t fully recovered yet and supply is definitely tight.”
By 06:00 AM ET, U.S. crude futures were up 1.9% at $99.13 a barrel, while Brent crude was up 1.9% at $103.55 a barrel. Both contracts gained over $2 a barrel the previous session.