Fed set to hike rates again. Microsoft & Alphabet shares rise after earnings – Daily Market Brief, July 27, 2022

The Fed is expected to hike rates by 75 bps for a second straight meeting. Investors will be watching for what the Fed guides for September.

·         Microsoft & Alphabet miss on earnings, but the share prices are rising pre-market

·         Fed’s rate announcement is due, a hawkish-sounding Fed could boost the USD and weigh on stocks

·         Lloyds upwardly revises outlook even as profits slip

European stocks closed broadly lower yesterday amid rising fears of energy security in the region as Russian gas flow will drop significantly today and is likely to accelerate the mover into a recession. The FTSE outperformed its peers thanks to commodity stocks tracking commodity stocks higher.

The US saw a similarly depressed session, with retail stocks taking a hammering after Walmart issued a profit warning and as consumer confidence tumbled to the lowest level in almost two years amid surging inflation.

US earnings season is ramping up this week with US big tech in focus. After the closing bell, Alphabet and Microsoft reported.

Microsoft reported record revenues of $51.87 billion, up 12% from the same period the previous year but below the $52.44 billion forecast. EPS was $2.23 lower than the $2.29 expected. Microsoft cited a stronger USD and slowing PC sales for the miss. However, a rosy outlook has helped the share price climb after hours.

Alphabet missed on both the top and bottom lines in Q2. EPS was $1.21 against forecasts of $1.28 on revenue of $69.69 billion, just short of $69.9 billion expected. Ad revenue grew at a slower pace as marketers reined in spending and USD strength knocked 3.7% off revenue growth. The share price trades 5% higher pre-market but has lost around a quarter of its value this year.

Federal Reserve

Looking ahead, the likes of Meta, Boeing, and Ford are set to release earnings in the US session. However, the main focus is likely on the Federal Reserve monetary policy announcement. The Fed is widely expected to hike rates by 75 basis points, but a 100-basis point hike can’t be discounted entirely, although the market has pared back its 100 basis point rate hike expectations significantly over recent weeks. Ever since hawks James Bullard and Christopher Waller said that they were good with 75 bps, expectations were tempered, and the USD fell back from a 20-year high.

Investors will be watching closely for what the Federal Reserve are planning for September – a 50 basis point hike or a 75 basis point hike as policymakers continue to battle against 40-year high inflation but also as growth slows and recession fears rise.

For now, the Fed is expected to stick to the narrative that inflation must be brought under control even if that means slowing growth. A hawkish-sounding Fed could lift the USD and dragon stocks. Any consideration for rising recession fears could be interpreted as the Fed taking its foot off the rate hiking gas. This could well be saved for the September meeting, by which time economic data could be showing a more decisive slowdown.

Lloyds

Earnings are coming through thick and fast not just in the US but also in the UK. Lloyds reported a drop in H1 profits but upwardly revised its outlook for the year thanks to rising interest rates. Lloyds reported a pre-tax profit of £3.7 billion in H1, down from £3.9 in the previous year but well above the £3.2 billion forecast. Lloyds set aside £377 million for bad loans, compared to a release of reserves last year. Lloyds is the first of the major UK banks to report with Barclays, and NatWest is due on Thursday and Friday respectively.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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