The US Federal Reserve did not surprise by raising rates by the expected 0.75% (1% was also in play) to a target range of 3.00 – 3.25%, the highest since early 2008. Instead, the market’s surprise is that most central bankers expect further rate hikes up to 4.50% by the end of the year. The uncertainty was exacerbated when Fed chief Jerome Powel said that the risk of a recession is still present, yet no one knows how severe the recession will be.
Meanwhile, US macro data during the week was not bad at all. Housing starts unexpectedly rose 12.2% MoM to an annualized rate of 1.575 million units in August, beating market expectations and recording the most significant increase since March 2021. Existing home sales fell 0.4% to a seasonally adjusted annual rate of 4.8 million, but the number was also better than expectations.
The PMI also surprised with growth. Activity in manufacturing was rising and accelerated even faster than in August (51.8 vs 51.5). Activity in the service sector is declining, but at a much slower pace than in August ((49.2 vs 43.7).
Central banks in Europe have also now definitively switched to hawkish monetary policy settings. The Bank of England raised rates by 0.5% for the second consecutive week, but markets were also pricing in the possibility of a 0.75% hike. Switzerland’s central bank increased rates by 0.75% and now has a base rate above zero for the first time since late 2014. The Norwegian central bank increased rates by 0.5% to 2.25%, and the Swedish central bank surprised by raising rates by 1% to 1.75%
Compared to the US, business activity is doing poorly. Activity in manufacturing fell from 49.6 to 48.5 and in the service sector from 49.8 to 48.9. The composite PMI fell to 48.2, the worst reading in two years.