Hopes that tightening might ease: despite an increasingly clouded economic backdrop, share prices around the world generally rose during July. Investor sentiment was buoyed by encouraging US earnings reports and by hopes that central banks might moderate their tightening activity in order to avoid undermining economic growth. 

US economy contracts again: having shrunk by 1.6% in the first three months of the year, the US economy contracted by 0.9% over the second quarter. Nevertheless, Federal Reserve (Fed) Chair Jerome Powell played down the prospect of recession, saying: “I do not think the US is currently in a recession … there are just too many areas of the economy performing too well”. The Dow Jones Industrial Average Index rose by 6.7% over July. 

Fed tightens again: the rate of US consumer price inflation continued to surge, hitting 9.1% year on year in June. As expected, the Fed raised interest rates by 0.75 percentage points during July, taking the key federal funds range to a range of 2.25% to 2.5% and fuelling concerns that the increase could put further pressure on economic growth. Chair Powell sought to reassure investors, saying it would “likely become appropriate to slow the pace of increases” while policymakers evaluate the impact of higher rates on inflation and growth. 

ECB makes its move: policymakers at the European Central Bank (ECB) raised interest rates by 50 basis points to zero. Although further increases are widely expected, they are likely to take place on a meeting-by-meeting basis. ECB President Christine Lagarde warned: “Economic activity is slowing … We expect inflation to remain undesirably high for some time”. The euro fell below the dollar for the first time in almost 20 years during July, but rebounded following the ECB’s decision to raise rates. The European Commission cut its growth forecast for the European Union for 2023 to 1.4%, citing the impact of the war in Ukraine on food and energy supplies. Over July as a whole, the Dax Index rose by 5.5%.

Clouds lifting for Japan? The Bank of Japan downgraded its growth forecast for the current fiscal year from 2.9% to 2.4%, but expects the economy to recover towards the second half as the impact of Covid-19 and supply-chain issues begins to moderate. The Nikkei 225 Index rose by 5.3% during July.