Market developments - July 2022


Since July is the summer holidays season, most market participants may have wished that this month would proceed relatively uneventfully. But July 2022 has been anything but uneventful. The most important event was probably that the two Western central banks (the Fed and the ECB) both hiked their interest rates over the month. The increases per se from the banks were anticipated but the size (+75 bps from the Fed and +50 bps from the ECB) was anxiously awaited. As is well-known, the Fed also hiked its interest rates by 75 bps in June and has with an interest rate of 2.25% now hiked its rate historically fast. Usually, the ECB (and Danmarks Nationalbank) only hikes its interest rate in steps of 25 bps but the increase of 50 bps in July shows that the rising inflationary trends also give rise to concerns in the euro zone. Moreover, it is the first interest-rate hike from the ECB in 11 years (see chart 1).

Another important trend in July was that the economic indicators from the large economies continued their negative trend from May and June. Hence, several growth indicators are approaching recession levels at a slightly higher pace than had been expected by the market.

Given the above trends, it may seem strange that risky assets reported decent returns in July. In our view, this is due to two circumstances. Firstly, decreasing economic growth will also ease the pressure on the central banks to introduce additional interest-rate hikes since the pressure on inflation will be on the decrease during recessions. The rising interest rates have in 2022 been one of the primary reasons behind the heavy beating in the equity market.

Chart 1: Highest US inflation in 40 years