This week, the United States (US) Federal Reserve (Fed), debunked speculation that an interest rate pivot might be on the horizon, sending markets into a fresh bout of risk aversion.
Key themes for this week include:
- Fed hikes rates by another 75 basis points
- Bank of England (BoE) takes its lead from the Fed
- Dollar soars on the back of a hawkish Fed
- Commodity pricing – a sea of red
FED HIKES US RATES
The unexpected harsh messaging delivered by the Fed on Wednesday night sent shockwaves through the market, bringing the recent, and rather short-lived, risk rally to a screeching halt. While the Fed moved to hike interest rates by 75 basis points, as expected, Fed Chairman, Jerome Powell, debunked speculation that the Fed will be pivoting on their stance any time soon. In contrast, he highlighted that interest rates will likely remain higher for longer than expected and will likely exceed previously anticipated levels.
While markets are reeling from the Fed’s hawkish message, the fact that a slowdown in the pace of interest rate hikes can be expected going forward, has largely been overshadowed. This hike in interest rates marked the sixth hike by the Fed in a year, with another, albeit potentially smaller, pencilled in for December. Powell proceeded to add that even as rate hikes might slow down, “It’s very premature to be thinking about pausing…we have a way to go.”
Pointing towards recent inflation numbers, that remain significantly high, the Fed indicated that rates might very well end up exceeding the target of 4.5% – 4.75% initially anticipated, adding that while economic growth is starting to show signs of a slowdown, there is no indication that inflation is gearing up for a meaningful turnaround just yet.
DATA IN A NUTSHELL
The BoE, in a widely expected move, delivered a 75 basis point rate hike, its most significant rate increase since 1989, as it seeks to tame record levels of inflation. The central bank forecasts inflation to hit a 40-year high of 11% during the current quarter. At the same time, policymakers warned that Britain has already entered a recession which could last two years.
The official Chinese NBS Manufacturing Purchasing Managers’ Index (PMI) unexpectedly fell to 49.2 in October, down from 50.1 in September and falling below market forecasts of 50.0. This was the lowest reading since July, amid strict COVID-19 lockdown restrictions in several big cities. Output, new orders, and export sales all fell, and buying activity also declined, following an increase in September. Employment dropped at a steeper rate than anticipated.
South Africa’s private sector credit increased by 9.74% year-on-year in September, exceeding market expectations of 8.15%, following a 7.86% increase in August. This marked the fifteenth consecutive month of growth in private sector credit and its steepest pace since December 2015. Meanwhile, expansion in the broadly defined M3 measure of money supply, including currency, deposits and liquid assets, grew by 8.75% in September. South Africa’s trade surplus widened to R19.7 billion in September, up from a downwardly revised R6.2 billion in the previous month and well above market forecasts of R5.3 billion. Exports surged by 10% month-on-month to R191.6 billion, mainly boosted by shipments of wood pulp & paper, precious metals and stones, and vehicles & transport equipment. Top export partners were China, the US and Germany. Meanwhile, imports rose at a slower pace of 2.3%.
STOCKS REEL AFTER FED POSITION
US stock futures edged lower on Thursday after the major indices faced heavy selling pressure during Wednesday’s session, after the Fed signaled that fiscal tightening was far from over. The Dow Jones lost 1.55%, while the S&P 500 and Nasdaq Composite declined 2.5% and 3.36%, respectively. Futures contracts tied to the three major indices all fell, shedding at least 0.2% across the board. On the corporate front, Qualcomm, Roku, Fortinet, MGM Resorts and Cognizant Technologies all dropped on weak quarterly updates, while Etsy, Robinhood and Zillow gained on better-than-expected third quarter results.
Equities in London also dipped for a second consecutive session on Thursday, with the benchmark FTSE 100 hovering around the 7 100 level, dragged down by real estate and technology stocks. Investors digested the latest monetary decision from the BoE, while markets were already under pressure following the hike by the Fed. On the corporate side, BT fell more than 7%, and was among the worst performing companies in the index, after the broadband and mobile operator warned about rising operating costs.
European stock markets traded largely in the red on Thursday, as investors came to terms with the more hawkish-than-anticipated messaging from the Fed. On the corporate front, German carmaker BMW reported a better-than-expected quarterly net profit but warned that rising inflation and interest rates would start to weigh on sales in the upcoming months, while cement maker Heidelberg Materials said it was expecting a 10% drop in 2022 operating profit. In addition, soon-to-be-nationalised gas importer, Uniper, reported a €40 billion net loss.
The JSE FTSE All Share Index shed over 1% to trade at a one-week low on Thursday, the second straight session of losses, on the back of comments by the Fed. Market sentiment also came under pressure as a result of weak Chinese economic data. Several sectors were trading in the red, led by resource-linked shares and tech stocks. On the earnings front, mining company, Gold Fields reported a 1% fall in third-quarter production and backed its full-year outlook, while AngloGold Ashanti, reported a 20% rise in third-quarter production, boosted by higher grades and efficiency gains across most assets, and reaffirmed it was also on track to fulfil its full-year projections.
GOLD AND OIL WEIGHED DOWN BY THE DOLLAR
West Texas Intermediate Crude futures traded around $88.50/barrel on Thursday, moving away from a three-week high of $90.40/barrel in the previous session, as investors reacted to concerns about a potential recession-driven downturn in demand. Even as the Fed’s hawkish tone spooked the market, prospects that global oil markets would remain extremely tight, assisted in limiting losses. The extended Organization of the Petroleum Exporting Countries, OPEC+, recently agreed to cut production by two million barrels per day in November, the biggest reduction since the pandemic. Speculation is also increasing that the oil cartel will intervene further in markets to drive up prices.
Gold prices traded below $1 640/ounce on Thursday, holding onto losses from the previous session after the Fed’s hawkish comments. Gold prices hovered close to the lowest levels since April 2020, as a general rise in interest rates increases the opportunity cost of holding non-yielding bullion.
Copper futures remained stable to trade around $3.50/pound during the first week of November, as investors weighed signs of lower demand against the possibility of a supply crunch. Manufacturing PMIs for China pointed to yet another contraction in factory activity, as the world’s top consumer struggles to recover from COVID-19 lockdowns and power shortages. In addition, data showed industrial profits declined 2.3% in the first nine months of the year.
DOLLAR RAMPAGE CONTINUES
The US Dollar Index extended gains to 113 on Thursday, on track to move back to 20-year highs after the Fed said interest rates will peak at higher levels than previously expected. Meanwhile, the US economy continues to show remarkable resilience, despite some sectoral slowdowns. While inflation remains elevated and is holding at 40-year highs, the country’s gross domestic product (GDP) rebounded in the third quarter, from a contraction in the previous two quarters and with employment has continued to rise. Traders will turn their attention to the nonfarm payrolls report due later today.
The euro weakened to just below $0.98, as investors turned to the US dollar as a safe haven asset, following the more hawkish Fed message. In addition, the European Central Bank (ECB) is set to tighten monetary policy further in the coming months as inflation has proved worse and more persistent than policymakers had expected. The ECB President, Christine Lagarde, said on Tuesday that the bank will keep raising interest rates, even though the probability of a eurozone recession has increased. Recent data showed headline inflation in the eurozone accelerated to a fresh record of 10.7% in October, well above the bank’s target of 2%, driven by energy and food prices; while the region’s GDP growth slowed sharply to 0.2% in the July to September period, its weakest pace in six quarters.
The British pound also weakened, trading as low as $1.20 on Thursday, after the BoE raised rates by 75 basis points, as expected, and said further increases in the bank rate may be required for a sustainable return to the inflation target, albeit to a peak lower than priced into financial markets.
The South African rand depreciated towards R18.50/$, back to levels not seen since May of 2020, on the back of a rallying greenback. Locally, the South African Reserve Bank (SARB) is widely expected to continue its tightening policy. The SARB Governor, Lesetja Kganyago, said South Africa still has space to raise interest rates, citing the need to get inflation expectations more anchored around the midpoint of its target range of 3% to 6%. He added that the consequences of the central bank loosening its grip on inflation and falling behind global peers, as rates are being normalised, would be “too costly”. The rand continues to take its cues from the global market landscape.
The rand is trading at R18.33/$, R17.91/€ and R20.54/£