It has been yet another eventful, and volatile week, as investors continue to digest inflation data in an attempt to navigate the anticipated interest rate trajectories.
Key themes for this week include:
- European Central Bank (ECB) hikes interest rates by 75 basis points
- United States (US) Gross Domestic Product (GDP) data surprises to the upside
- Oil prices gain momentum
ECB HIKES INTEREST RATES
The ECB has expressed its concerns that inflation is becoming entrenched and has acted to combat the region’s historic surge in inflation. On Thursday, the Central Bank hiked interest rates by 75 basis points, as expected, and announced a change to the terms of its ultra-cheap loans to commercial banks, in a bid to reign in its bloated balance sheet. The interest rate now sits at 1.5%, its highest level since 2009. In the upcoming months, there are further interest rate hikes on the cards as the ECB moves to undo more than a decade’s worth of loose monetary policy.
The ECB highlighted that it would continue to raise rates in an effort to achieve the 2% inflation target, even if it comes at the cost of economic growth. While the expectation of rate hikes remain, markets are positioning for a slow down in the pace of these hikes, anticipating that the deposit rate will hit 2% in December, then peak at around 3% some time in 2023. The timeline and pace of the interest rate hikes remains largely dependent on the continuous monitoring of price pressures alongside economic data.
When questioned about the negative economic impact these interest rate hikes will have on the European economy, which faces many economic headwinds including the continuing war in Ukraine, ECB president, Christine Lagarde, made it clear that the ECB’s mandate is to ensure price stability, and it would adhere to this.
DATA IN A NUTSHELL
The US economy expanded by an annualised 2.6% quarter-on-quarter in the third quarter, exceeding market expectations of 2.4% and rebounding from a contraction in the first half of the year. The biggest positive contributor to GDP was net trade, as imports fell, while exports rose sharply. The data also revealed a sharp rise in business investment, while consumer spending grew at a slower pace but remains resilient.
The Chinese economy expanded 3.9% year-on-year in the third quarter, exceeding market consensus of 3.4% and picking up from 0.4% growth in the second quarter. Growth was boosted by various measures from Beijing to revive activity, but lags targets set by the government to revive economic growth post pandemic. September data indicated a mixed recovery in China, with retail sales rising by their lowest rate in four months, while export growth wallowed at a five-month low. For the first nine months of the year, China’s GDP grew by 3%. Chinese GDP data was originally scheduled to be released on 18 October 2022 but was delayed until the end of the Communist Party Congress, where President Xi Jinping secured his 3rd term.
The composite leading business cycle indicator in South Africa declined by 2.3% month-on-month in August, after declining by 1% in July. This marked the second straight month of decreases in the index and its highest decline in 13 months. The largest negative contributors were the dip in the number of residential building plans approved and a narrowing of the interest rate spread. The single positive contribution came from an increase in the volume of orders in manufacturing.
UK car production contracted by 6% year-on-year, to 63 125 units in September, following four consecutive months of growth, as output was, yet again, restricted by supply chain disruptions affecting manufacturers, as well as high energy costs and component shortages. The S&P Global/CIPS UK Composite PMI (Purchasing Managers Index) dipped to 47.2 in October, from 49.1 in September, coming in well below expectations of 48.1, marking its steepest decline in 21 months.
EARNINGS IN FOCUS
The US based Dow Jones jumped over 400 points on Thursday as investors digested better-than-expected US GDP data and upbeat company results. Caterpillar surged more than 8% after the heavy-equipment maker topped Wall Street estimates for revenue and profit. Media and technology company, Comcast and fast-food chain, McDonalds, added 6% and 3%, respectively, following earnings reports that surpassed estimates. In contrast, the Nasdaq shed more than 1%, and S&P 500 remained subdued on disappointing earnings from big tech. Facebook-parent, Meta, sank almost 25% after missing earnings estimates and offering a weak outlook for the fourth quarter.
London based stocks traded mostly in the green on Thursday, as gains among energy stocks offset losses in the heavyweight materials sector. Investors continued to digest several earnings results alongside the aggressive rate hike from the ECB. On the corporate front, oil major, Shell, added 5% after reporting a third-quarter profit. However, lower refining and trading revenues marked an end to its run of record quarterly earnings.
Moving to the European market, both the DAX and the STOXX 600 traded mostly sideways, as they struggled to erase earlier losses. Investors are digesting the latest ECB interest rate decision, while focusing on corporate results. Credit Suisse plummeted more than 15% after reporting a third-quarter net loss of 4.034 billion Swiss Francs.
The Japanese based Nikkei 225 Index fell 0.32%, while the broader TOPIX Index lost 0.66% on Thursday, tracking a weak session on Wall Street overnight, as investors digested mixed corporate earnings results. Financial stocks led the market lower, with losses from heavyweight banks such as Mitsubishi UFJ and Sumitomo. Meanwhile, energy firms gained on firmer oil prices, with Inpex Corp rising 1.5%.
SOFTER DOLLAR SUPPORTS COMMODITIES
Brent Crude futures traded around the $96/barrel mark on Thursday after gaining nearly 3% in the previous two sessions, supported by data indicating record levels of US crude exports. The US’s total petroleum shipments reached 11.4 million barrels a day even as fuel inventories hit seasonal lows in domestic markets, adding to concerns about tight supply. A sharp retreat in the dollar has also assisted oil prices, as greenback-priced commodities have become less expensive.
Gold prices gained, to trade above $1 660/ounce on Thursday, hovering near its highest levels in two weeks, as the dollar and US Treasury yields retreated sharply on growing expectations that the US Federal Reserve (Fed) will slow the pace of rate hikes towards the end of the year. Key US economic data supported this position, signaling that tighter financial conditions are already having an impact on the economy. Investors however remain cautious that upside risks to inflation could result in another rally in the dollar and Treasury yields.
Copper futures rose to above $3.50/pound, trading at its highest levels since 12 September, supported by a weaker dollar and hopes that demand may improve on the back of a less aggressive Fed. Concerns of tight supply remain prominent, with industrial players flagging increasing risks of shortages. Commodity trader, Trafigura, warned that global copper stocks have fallen to record lows, with current inventories only sufficient to supply world consumption for 4.9 days.
INTEREST RATE TRAJECTORY IN FOCUS
The US Dollar Index regained some of its lost ground on Thursday, recovering from its lowest level in over a month, after US GDP data indicated that the US economy remains resilient, despite rising interest rates. The dollar came under pressure earlier this week, as investors bet on an increasing probability of a slow down in the pace of interest rate hikes by the Fed.
The Euro shed over 1% and retreated below dollar parity on Thursday, as investors scaled back bets on the amount of future tightening by the ECB. Money markets now expected the deposit rate to peak around the 3% mark next year, compared with an initial expected peak above 3.25%. This comes after the ECB decided to raise its three key interest rates by 75 basis points for the second time in a row.
The pound traded at its highest level, since mid-September, against the dollar, edging above the $1.15 mark, as investors welcomed the appointment of Rishi Sunak as Prime Minister. Investors are also gearing up for another interest rate hike by the Bank of England next week. They have priced in a 75 basis point hike that will push borrowing costs to a level not seen since 2008. The annual consumer inflation in the UK returned to a 40-year high of 10.1% in September, signaling that policymakers will have to do more to reign it in.
The Japanese yen gained some ground against the greenback, to trade towards ¥145/$, hitting its highest levels in over two weeks, as the dollar retreated sharply against its major peers on growing expectations that the US Fed will soon slow the pace of its rate increases. The yen also recovered further after touching a 32-year low of ¥151.94/$ last week. Analysts have suggested that this low prompted Japanese authorities to intervene again in the currency market. Financial Times reported that the government has spent a further $30 billion in its latest yen-buying operations.
The rand continues to take its lead from global determinants. While the currency showed little reaction to the local MTBPS on Wednesday, it staged an impressive rally against the softer dollar on Thursday, trading to highs of R17.87 during local trade.
The rand is trading at R17.99/$, R17.96/€ and R20.78/£