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09 May 2022
- The past week was dominated by central banks and interest rate decisions. The markets were not surprised by US Fed when the rates got increased by 0.5% to a range of 0.75%-1%, the biggest hike in 22 years. While the Fed is battling inflation, Jerome Powell made a statement after the FOMC meeting on Wednesday saying that another series of 0.5% hikes is likely to come, but that raising rates by 0.75% is not being considered. The Fed would also begin allowing its holdings of Treasuries and agency mortgage-backed securities to decline in June at an initial combined monthly pace of USD 47.5 billion, stepping up over three months to USD 95 billion. However, statements from other Fed officials and other data supporting further inflation growth ultimately lead to the belief that 0.75% may not actually be completely off the table.
- The Bank of England also raised its interest rate by 25 basic points, which, while meeting expectations, came as a surprise when 3 members voted for a larger 50bps increase. Borrowing costs are at their highest since early 2009, but the central bank delayed reducing its stockpile of bonds bought under its asset purchase program. Central bankers have to fight inflation, which has intensified sharply following Russia’s invasion of Ukraine and may reach 10% by the end of the year. On the other hand, they expect that the UK economy may contract around 1% in Q4, due to a decline in households’ incomes.
- The Reserve Bank of Australia raised its cash rate by 0.25% to 0.35%, but markets were rather expecting a 0.15% rise. This is the first rate hike since 2010, with the bank expecting further increases to combat rising prices. The economy is expected to grow by 4.25% this year and 2% in 2023, but prices and wages are rising faster than expected.
Indices
US stocks have had a very volatile week, falling for the fifth week in a row (DJIA for the sixth). While Wednesday’s comments from central bank chief Jerome Powell were perceived by markets as more dovish than anticipated, Thursday’s labor market data and comments from other Fed officials brought investors back to earth. The Dow dropped more than 1,000 points on Thursday (by contrast, it had gained nearly 1,000 points on Wednesday) and once again fell into correction territory, losing more than 10% from its recent highs. The S&P 500 is in a similar position, and Nasdaq and small-cap Russell 2000 index are even in a bear market now.
Stocks in Europe have also reacted to the possibility that the central bank will begin to tighten its monetary policy to fight inflation, following the US Fed’s lead. The ongoing conflict in Ukraine and the continuing lockdown in China, which is losing its battle with the coronavirus, are not adding to investors’ confidence. The pan-European STOXX Europe 600 index fell 4.55%, the French CAC 40 shed 4.22%, Germany’s DAX fell 3.01% and the UK’s FTSE 100 lost 2.08%.
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US30 -0.44% |
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US100 -1.46% |
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US500 -0.38% |
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GER40 -3.01% |
Commodities
Oil has been quite volatile, but on Wednesday, the price got a boost from European Commission President Ursula von Leyen’s statement that the EU is planning a complete import ban on all Russian oil, seaborne and pipeline, crude and refined. Russian oil accounts for more than a quarter of the EU’s imports, so European refiners will have to look for new oil suppliers. “In the near term, the fundamentals for oil are bullish and it is only fears of an economic slowdown in the future that is holding us back,” Phil Flynn, an analyst at Price Futures Group told Reuters.
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Gold -0.71% |
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Silver -1.77% |
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BRENT +5.52% |
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NATGAS +9.90% |
Forex
The US Dollar continues to rise and has exceeded its 20-year highs in the past week, with the US Dollar Index surpassing 104 points. The Fed’s aggressive approach and the fact that a 0.75% rate hike is still on the table is increasing demand for the US currency and analysts expect further gains.
“Moves in U.S. interest rates are not the only dollar support,” said strategists at NatWest. “Downside risks to global growth stemming from Ukraine and China are more pressing for Europe and Asia relative to the U.S., creating an air of 2018-style dollar exceptionalism.”
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EUR/USD -0.02% |
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USD/JPY +0.54% |
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GBP/USD -1.88% |
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USD/CAD +0.40% |
Macro
The yield on the 10-year US Treasury bond broke above 3% last week for the first time since late 2018, ending Friday at 3.14%. In addition to the 0.5% rate hike, the recent jobs report also showed the US economy added 428K jobs in April, the same as in March and more than market forecasts, reinforcing a more hawkish Fed stance.
The yield curve continues its steepening trend as long-term inflation expectations and long-maturity Treasury yields increased. T. Rowe Price traders noted that thin liquidity in the Treasury market exacerbated the steepening move.
What to watch out for this week
- Investors will be anxiously awaiting US inflation data next week. March’s 8.5% y/y was heavily influenced by record gas prices and growth is expected to slow to 8.1% in April. Worse than expected numbers could mean that the Fed will continue its aggressive monetary policy, which could lead to a recession in the US economy.
- Several Fed officials will have their say on monetary policy, including Atlanta Fed President Raphael Bostic, New York Fed President John Williams, Fed Governor Christopher Waller, Minneapolis Fed President Neel Kashkari, Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly.
- In Europe, the German ZEW index and UK GDP will be particularly keenly awaited. The German ZEW economic sentiment index fell in April to its lowest reading since early 2022 and economists expect it to fall further. GDP in the UK is expected to grow by 1% in the first quarter, according to preliminary data, and 9% y/y. However, high inflation is forcing the central bank to raise rates, which is expected to have a negative effect on economic growth. Several ECB officials will speak about monetary policy in Europe, but the most expected is from the head Christine Lagarde.
- Inflation will also be watched in China, where prices are expected to rise due to lockdowns and food shortages. However, Monday’s trade balance data surprised positively right at the start of the week.
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