A very important week for markets with undoubtedly the central bank policy meetings in the US and the UK as standouts. In addition, we have the Swiss National Bank, Riskbank in Sweden and Norges Bank in Norway also expected to raise rates.
Global equity markets were in retreat last week ahead of the Federal Reserve key policy meeting this week.
Review of last week’s key action
FTSE -134 -1.81% DOW -1,276 -3.97% S&P -187 -4.6% NASDQ -724 -5.75% DAX -374 -2.84% NIKKEI -883 -3.10% Hang Seng -593 -3.07%
US Equity markets suffered their biggest weekly falls since early June as analysts are now convinced the Federal Reserve will raise rates by 0.75%, with some pundits anticipating a full 1% hike in rates.
The risk-off move saw the US dollar resume its bull run with the US Dollar index consolidating its gains from the previous Friday’s move.
The main catalyst for the move was the disappointing inflation data released mid last week. The headline and core rates were higher than expected, quashing suggestions from the previous month that inflation had peaked.
Of particular concern to the Federal Reserve will be the jump in the core rate which suggests inflation is starting to become baked into people’s expectations. Following hot on the heels of the inflation data, the Producer Price Index which effectively measures the costs of goods and services going into production, was also stronger than forecast, suggesting further inflation down the line. In reaction to the stronger than expected data, expectations hardened for a 0.75% rate rise from 69% probability to an 82% probability.
UK markets were in subdued mood during the national period of mourning for the Late Queen Elizabeth II.
The plan of the new administration under Liz Truss is clearly focussed on growth. But until plans are officially announced following Monday’s state funeral for the Queen, there has been little to trade off. Of significant concern is a ballooning deficit which could undermine both UK Sovereign debt and sterling.
EURUSD unchanged GBPUSD -1.69 -1.45% USDJPY +0.25 +0.17%.
US Dollar strength was in evidence as expectations for the Federal Reserve’s next move hardened. Whilst a 0.75% move is the likeliest, there is a 20% probability of a full 1% hike in rates.
Sterling took another leg lower, touching a 37-year low versus the US Dollar. In fact, Sterling was weak across the board, falling from 1.1510 versus the Euro to 1.1418 as traders express concern that the UK will be in recession for a prolonged period unless the new administration pulls off a jump in growth prospects. Judging by reports in the weekend press of cuts in employment taxes, income taxes, corporation tax and energy price caps that may just be something that could materialise.
Gold -41 -2.38% UK OIL -0.78 -0.84% US OIL -0.91 -1.05% Bitcoin -1,533 -7.21%.
Gold, oil, and other US Dollar based commodities all succumbed to the slump in equities and uptick in the US Dollar. Gold slipped further, probing lower levels, last seen in April 2020 as the twin effects of a strong US Dollar and higher funding costs dented the precious metal’s alure. Oil remains constrained by the effects of decent supply but lowering demand, especially from China, as the global economy continues to cool.
Data / events for the week ahead
An especially important week with key policy announcements from
several central banks – the key ones being the Federal Reserve from
the US and the Bank of England.
Monday:
UK - Bank Holiday for the state funeral for the Late Queen Elizabeth II.
Tuesday:
Australia - Monetary Policy Minutes. AUD sensitive.
Wednesday:
US - Rate decision from Federal Reserve’s rate setting committee the FOMC. Expectation for a 0.75% interest rate hike to 3% – 3.2% band. There remains a 1 in 5 chance of a full 1% hike. Global stock and bond markets, US Dollar, and commodities all extremely sensitive to this announcement.
Thursday:
Japan - Bank of Japan (BOJ) policy meeting. Japan is out on its own, defying speculators and enduring the consequences as the central bank sticks to its very loose monetary policy in the face of raging global inflation. Surely the Japanese Yen will be the BOJ’s undoing? Japanese Yen, Japanese Bonds, and equities sensitive. Especially if the BOJ budges.
Switzerland - Swiss National Bank policy meeting. Expectation is for another 0.75% hike in rates to 0.5% from minus 0.25%. CHF sensitive.
UK - The rate setting committee of the Bank of England, the MPC, deliberates over a further increase in rates. The expectation is for a hike of 0.5% to 2.25% from, 1.75%. There also remains a risk that rates will be hiked by 0.75%. However, the modest down-tick in inflation announced last week may just tip the scales in favour of a 0.5% hike. GBP, UK equities and bonds all extremely sensitive to the outcome.
Friday
EU, UK & US - Flash Manufacturing & Services PMI data. A general trend lower in both sectors expected as the global economy continues to suffer the consequences of the acceleration in inflation following the end of the pandemic and the Russian war in Ukraine. US Jay Powell speaking - delivering opening remarks at a Fed event in Washington.
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