It’s been a big week for markets, with the United States (US) Federal Reserve (Fed) delivering its much-anticipated interest rate hike. However, it was not the only central bank singing a hawkish tune.
Key themes for this week include:
- Wave of interest rate hikes by central banks across the globe
- Stock sell-off takes a breather
- Oil continues its dance with supply and demand, while gold buckles under the strength of the greenback
- Japanese authorities intervene, as yen falters
HAWKISH STANCE THE ORDER OF THE DAY
On Wednesday, the US Fed raised the federal funds rate by 75 basis points during its September meeting, marking the third 75 basis point hike in a row. The move yanked borrowing costs to their highest levels since 2008. Policymakers also, yet again, reiterated their expectation that further hikes would be appropriate, given the current economic circumstances and poor inflation outlook. During the press conference, Fed Chair, Jerome Powell, stated that it is crucial that inflation is brought under control, and that there is, unfortunately, no painless way of doing so. The so-called dot plot indicates that US interest rates will likely fall to 4.4% by December, above the 3.4% projection made in June, and a rise to 4.6% is expected next year. Meanwhile, US GDP growth forecasts were revised downward to show a 0.2% expansion this year, compared to original 1.7% expectation in June. The 2023 expansion was revised down to 1.2% in 2023, below June’s 1.7% forecast.
Thursday was an eventful day, with the Bank of Japan (BOJ), Bank of England (BoE) and the South African Reserve Bank (SARB) all in the spotlight for their respective interest rate decisions. The BoE raised its key interest rate by 50 basis points to 2.25%, its seventh consecutive rate hike. The hike pushed borrowing costs in the UK to their highest levels since 2008. The central bank also voted unanimously to reduce the stock of purchased United Kingdom (UK) government bonds – financed by the issuance of central bank reserves – by £80 billion over the next twelve months. The bank also noted that uncertainty around the outlook for retail energy prices has fallen, following the announcements of support measures, including an Energy Price Guarantee, which is likely to significantly limit further increases in inflation. The BoE added that it will make a full assessment of the impact on demand and inflation from both the country’s energy plan and its additional growth plan.
SARB raised its benchmark repo rate by another 75 basis points to 6.25% at its September Monetary Policy Committee meeting, which was as expected. This marks the sixth consecutive hike since policy normalisation started in November 2021 and was driven by price pressures brought on by a weakening currency and the ongoing monetary policy tightening by the US Fed. The annual inflation rate of South Africa, eased to 7.6% in August, from an over 13-year high of 7.8% in July, marginally higher than market expectations of 7.5%. The reading, however, remains well above the upper limit of SARB’s target range of 3%-6% for a fourth straight month.
In contrast, the BOJ maintained its key short-term interest rate at -0.1% and the 10-year bond yield at 0% during its September meeting. Policymakers mentioned that Japan’s economy is expected to remain under worrisome downward pressure, amid high commodity prices brought on by the prolonged war in Ukraine.
Some of the other noteworthy rate adjustments for the week included an unexpected 100 basis point cut by the Turkish Central Bank, as it becomes clear a recession is unavoidable in the region. Vietnam hiked interest rates by 100 basis points for the first time since 2011, in an effort to keep its inflation below 4%. The Swiss National Bank also followed the example of the Fed, hiking rates by 75 basis points. The moves saw Swiss interest rates move out of negative terrain for the first time since 2011.
DATA IN A NUTSHELL
The number of Americans filing new claims for unemployment benefits rose by 5 000 to 213 000 in the week ending 13 September, below market expectations of 218 000. It marked a slight increase from the previous week’s downwardly revised value, which was its lowest level since May. The numbers, however, still point to a tight labour market. The four-week moving average, which removes week-to-week volatility, fell by 6 000 from the prior week to 216 750.
The annual inflation rate in Japan rose to 3% in August 2022, its highest level since September 2014, on the back of rising food and raw material prices, as well as yen weakness.
While Turkey remains in an economic a crisis, its consumer confidence indicator edged up to 72.4 in September from 72.2 in the previous month, recovering further from a record low of 63.4 hit in June. There were improvements in market expectations over the next 12 months regarding the general economic situation and the major purchasing climate. On the flip side, sentiment deteriorated for households’ financial situation, which will further deteriorate over the next 12 months.
The composite leading business cycle indicator in South Africa fell by 1% month-on-month in July, its biggest decline in 10 months, as six of the 10 available component time series decreased, while four increased. The largest negative contributors were a decline in the number of residential building plans approved and a decrease in the composite leading business cycle indicator for South Africa’s main trading-partner countries. By contrast, the largest positive contributors were an acceleration in the six-month smoothed growth rate in new passenger vehicle sales and a widening of the interest rate spread.
STOCKS CONTINUE THEIR DESCENT
The Dow Jones Industrial Average lost further ground on Thursday bringing its monthly losses to 8.3%, while the S&P 500 and Nasdaq fell roughly 0.5% each, as investors agonised over the consequences of tighter global monetary policy on US growth momentum.
The UK’s FTSE 100 recouped some of its losses on Thursday, after the BoE delivered a 50 basis point rate hike. The index is however still trading at three-week lows. In corporate news, British retailer, Sainsbury’s, has exchanged contracts with real-estate investment trust, LXi REIT, on a deal to sell 18 stores in southern England for £500 million, according to Reuters.
Main stock market indices in Europe treaded water and remained in the red on Thursday afternoon, as investors digested the wave of interest rate hikes, which have been implemented to combat soaring inflation across the globe. On the corporate front, Spanish bank, Sabadell, received indicative bids from France’s Worldline, Italy’s Nexi, and US firm Fiserv for its payments arm, with a deal potentially valued at up to €400 million. Italy’s market watchdog, Consob, has approved the buyout of luxury shoemaker, Tod’s, as proposed by the group’s founding family.
The South African JSE FTSE All Share Index traded 1% lower at around 65 550 on Thursday afternoon, a level not seen since mid-July, after SARB raised its key repo rate by 75 basis points. Policymakers kept inflation forecasts unchanged at 6.5% and cut the growth projections to 1.9% for 2022 but noted that the output gap is still expected to turn positive in the second quarter of 2023. Tech stocks and industrials led the losses, followed by financial stocks. Meanwhile, President Cyril Ramaphosa and his cabinet continue talks and discussions on how to address the country’s power crisis.
EUROPEAN NATURAL GAS PRICES EASE
Dutch TTF Natural Gas Front Month futures have been trading below €200/MWh during this week, their lowest level in nearly two months, as ongoing uncertainty about Russian supplies were countered by high levels of European natural gas storage – part of the eurozone’s governments’ plan to curb soaring energy prices. The European Commission’s plan, which includes raising €140 billion from energy companies’ profits and a mandatory cut on energy use, now needs to be approved by the EU member states. Further measures to ease volatility and increase trading volumes in energy markets are due to be presented by the Commission next week. Russian gas giant, Gazprom, has indefinitely shut down gas flows through its critical Nord Stream 1 pipeline and investors are worried about the remaining major route through Ukraine.
Brent Crude futures soared almost 2% to $90.50/barrel on Thursday, recovering from two consecutive sessions of losses, as hopes of higher Chinese demand and geopolitical tensions outweighed global growth worries. At least three Chinese state oil refineries and a privately run mega refiner are considering increasing runs in October, by up to 10% from September, on prospects of stronger demand and a possible surge in fourth-quarter fuel exports. President Vladimir Putin also announced a partial military mobilisation in Russia, raising fears of further supply disruptions. Energy giants Saudi Aramco and Crescent Petroleum flagged underinvestment in the oil sector, a prospect that is likely to keep prices elevated. Meanwhile, a global wave of central bank policy tightening added to market headwinds. Official data also showed that US crude inventories rose by 1.1 million barrels last week.
Gold prices weakened to around $1 660/ounce on Thursday, sliding back towards their lowest levels in over two years, weighed down by a rallying dollar, as the Fed delivered its third straight 75 basis point rate hike, while signaling further tightening. Other central banks across the globe have also been raising interest rates this week, with European Central Bank (ECB) President, Christine Lagarde, saying that the ECB might need to increase rates to restrictive levels to stem demand and combat surging inflation. Gold has also lost its shine as a store of value in times of economic uncertainty as the US’s relative economic strength and the Fed’s aggressive stance against inflation strengthened the dollar at the expense of other safe-haven assets.
WRATH OF THE MIGHTY DOLLAR
The Japanese government intervened to support the yen for the first time since 1998 on Thursday, after the currency extended losses to fresh 24-year lows, as the divergence between monetary policy in Japan and the United States widened further. The BOJ maintained its key short-term interest rate at -0.1% with Governor, Haruhiko Kuroda, stating that the Central Bank will not be raising interest rates for some time. The yen strengthened to ¥142/$ right after the intervention, having touched ¥145.9/$ earlier in the session.
The US Dollar Index rose above 111.5 on Thursday, reaching its highest levels in 20 years, after the Fed hiked rates and remained hawkish. Fed officials projected that interest rates will peak at 4.6% next year, and that there will be no rate cuts until 2024, defying market speculations that the Central Bank could ease policy in 2023 to manage the economy. The dollar also benefited from safe haven flows after Putin announced a partial military mobilisation in Russia. This was a significant escalation of the conflict in Ukraine. The greenback climbed to multi-decade highs against the euro and the sterling, while hovering at over two-year highs against the Australian and New Zealand dollars.
The euro hung below $0.99, not far from its weakest level since 2002, as investors try to assess how the ECB will manage to rein in inflation without causing too much damage to the economy. Investors scaled bets on larger ECB interest rate hikes after the Fed delivered a 75 basis point rate hike, widening the interest rate gap with the euro area. Money markets currently see the deposit rate at 3% by June 2023, implying a cumulative tightening to 225 basis points.
The British pound rose back above $1.13 but remained close to its weakest level in 37 years, as the BoE hiked interest rates for a seventh consecutive time to combat inflationary pressure. Policymakers said they would continue to “respond forcefully, [and] as necessary” to sustainably return inflation to the 2% target, despite the economy entering recessionary territory.
The South African rand briefly rubbed shoulders with an over one-week high of R17.40/$, before paring gains to trade at R17.60/$, after SARB raised the repo rate by 75 basis points. Meanwhile, growth projections were revised slightly lower for 2022 on the back of severe disruptions caused by flooding in KwaZulu-Natal in the second quarter and ongoing intense load-shedding. For 2023 and 2024, the economy is seen expanding more than previously estimated. The South African rand is still in fragile terrain, near a two-year low of R17.79/$, pressured by a stronger dollar and amid deteriorating domestic economic conditions, as loadshedding is posing a major threat to the country’s economic outlook.
The rand is trading at R17.62/$, R17.31/€ and R19.79/£.