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07 November 2022
- Investors and economists still have not received a clear answer on how long and to what level the Fed actually wants to raise interest rates. U.S. central bank chief Jerome Powell took a bit of a shot at investors on Wednesday when he first served them an expected rate hike.
- This was further backed up by a rather dovish FOMC statement that central bankers are taking into account the lag with which monetary policy affects economic activity and inflation. Because of this, they said the pace of rate hikes would need to be slowed.
- However, at the press conference, Jerome Powell surprised by pointing out that slowing the pace of rate hikes today might be too premature and the target rate might be higher than the original September assumptions. “The risks are asymmetric. If the Fed does too much, it can cut. If it doesn’t tighten enough, then you’re in real trouble… It is very premature to be thinking about pausing… We think we have a ways to go,” Powell said, among other things, sending the markets in the exact opposite direction they went just after the rate hike announcement.
Indices
US stocks fell last week mainly due to Fed chief Jerome Powell’s statement that the Fed is ready to continue the pace of rate hikes for longer than initially expected. The biggest losers were technology stocks, which suffered from the mostly poor results of large companies such as Meta Platforms, Amazon and Microsoft.
European stocks, on the other hand, strengthened for the third straight week after central bankers signalled a different direction than their US counterparts and may not be in such a hurry to raise rates. The pan-European STOXX Europe 600 ended the week 1.51% higher, Germany’s DAX added 1.63%, France’s CAC 40 gained 2.29%, and the UK’s FTSE 100 Index climbed 4.07%.
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US30 -1.40% |
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US100 -5.97% |
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US500 -3.43% |
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GER40 +1.63% |
Commodities
The commodity markets have had a good week, thanks mainly to Friday’s speculation that China plans to limit its measures related to its zero-COVID policy. However, this was a typical market overreaction as there is in fact no official information and on Monday Beijing confirmed its intention to continue with its strict zero-COVID strategy.
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Gold +2.36% |
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Silver +8.37% |
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BRENT +5.30% |
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NATGAS +13.83% |
Forex
In recent weeks, the US dollar has been somewhat clearing out the positions it accumulated in previous months. Wednesday’s hawkish comments from the Fed chief may have helped it to rise in the short term, but Friday’s conflicting labour market data eventually led to weekly losses in the dollar index, falling from 112.9 to 110.7.
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EUR/USD -0.11% |
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USD/JPY -0.56% |
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GBP/USD -2.07% |
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USD/CAD -0.90% |
Macro
GDP growth in the Euro Area slowed down from 0.8% to 0.2%, while the year-on-year growth slowed down from 4.3% to 2.1%.. The most anticipated news of the week has turned investors’ and economists’ heads, as we wrote in the first paragraphs.
The next important data from the US came from the labour market. The ADP and especially the NFP data once again beat expectations, as the addition of 261,000 jobs to nonfarm payrolls in particular, along with the upward revision to the September data, positively surprised, however the unemployment rate rose from 3.5% to 3.7%.
Like the Fed, the Bank of England did not surprise either, raising rates by 0.75% to 3.00%, the highest since 2008. BoE Governor Andrew Bailey then hinted that the pace of increases may not be as fast as everyone expects in the future.
Eurozone inflation rose to a record 10.7% year-on-year in October from 9.9%, mainly due to rising food and energy prices. Compared to the previous month, prices rose by 1.5%. Core inflation rose to 6.4% year-on-year from 6.0%.
GDP growth in the Euro area slowed from 0.8% to 0.2%, while year-on-year growth in the Euro area economy slowed from 4.3% to 2.1%.
What to watch out for this week
- The coming week will be somewhat weaker on macroeconomic data, and in the US in particular the midterm elections will play a major role.
- In the US, investors will be waiting in the first place for Thursday’s inflation data. This could give a clue as to how successful or unsuccessful the Fed’s campaign against rising prices is and whether Jerome Powell’s hawkish comments last week have merit. On the other hand, too-low data (8.0% year-over-year growth and 0.7% month-over-month growth are expected) could point to the threat of a recession.
- Also of interest will be the preliminary UK GDP data for the third quarter. Analysts and investors are expecting a 0.5% decline for the quarter and 4.4% year-on-year growth. The BoE is trying to fight inflation with a significant rate hike and last week, after raising rates by 0.75%, warned of a long recession that could last up to two years, longer than the last time in 2008-2009.
- Also of interest will be Friday’s final figures on German inflation in October, which is expected to rise from 10% to 10.4% in annual terms according to preliminary data, with prices up 0.9% on the previous month.
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