While the market has been holding its breath for a dovish pivot from the United States (US) Federal Reserve (Fed), the minutes of the Federal Open Market Committee’s (FOMC’s) September meeting, coupled with the US Consumer Price Index (CPI) release, smashed any dreams of an easing of policy.
Key themes for this week include:
- US inflation dips less than expected
- US stocks tumble
- Brent Crude and copper prices slide
- The dollar continues to rally, Japanese yen at 24-year low
FEDERAL RESERVE REMAINS HAWKISH
The minutes of the FOMC September meeting, indicated that all Fed policymakers unanimously agree on higher interest rates for longer, as the Fed continues its war on inflation. The hawkish stance from the Fed, supported by the most recent CPI and Producer Price Index (PPI) data, poses significant threats to growth, while continuously supporting a strong dollar at the detriment of risk assets. “Several participants noted that, particularly in the current highly uncertain global economic and financial environment, it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook,” the minutes said.
Wednesday’s US PPI indicated a slow-down in producer price inflation. The reading dipped to 8.5%, its lowest level since July last year, but still topped market expectations of 8,4%. On Thursday, the release of US CPI further bolstered the view that the Fed is miles away from a dovish pivot, as CPI, while declining, dipped by less than markets anticipated, indicating that inflation is taking much longer to cool than predicted. Consumer price inflation in the US eased to 8.2% year-on-year in September, its lowest level since February but above market expectations of 8.1%. This rate remains way above the US Federal Reserve’s target of 2%.
Members of the FOMC noted at the meeting that the economy needs to slow to get inflation to subside. The committee lowered their projections for economic growth, expecting GDP to grow at only a 0.2% annualised rate in 2022 and just 1.2% in 2023, well below trend and significantly lower than growth in 2021, which saw the strongest US growth since 1984.
The summary of economic projections at the meeting pointed to a “terminal rate,” to be around 4.6%. Markets expect the Fed to hike into early 2023 then keep rates flat at these levels throughout the year.
DATA IN A NUTSHELL
The jobless rate in the United Kingdom (UK) declined to 3.5% in the three months to August, its lowest level since 1974 and below 3.6% in the previous period. Meanwhile, job vacancies fell by 46 000 to 1 246 000, the largest fall since June to August 2020, although the number of vacancies remains at historically high levels. The number of unemployed people per vacancy fell to a record low of 0.9. The British economy expanded 2% year-on-year in August, missing market forecasts of a 2.4% increase. It is the lowest growth rate since the economic contractions in 2021, with the services sector rising 3.1%, while industrial production shrank 5.2%.
Industrial production in the euro area expanded 2.5% from a year earlier in August, after a revised 2.5% decline in the previous period, and beating forecasts of a 1.2% increase. Output rose for capital, durable and non-durable goods, while declines were seen for both energy and intermediate goods.
South African manufacturing production rose by 1.4% from a year earlier in August, the second consecutive month of increases, against market expectations of a 2% drop. The largest positive contributions came from the manufacture of motor vehicles, parts and accessories and other transport equipment. The South African Chamber of Commerce and Industry (SACCI) Business Confidence Index rose to 110.9 in September from 105.6 in August. This marks the highest reading since February, as an increase in tourism and trade volumes outweighed higher interest rates and lower share prices. “Business confidence presently remains resilient and at a better level than the average for 2020,” SACCI said.
WALL STREET SLIDES
The Dow Jones shed over 500 points on Thursday, while the S&P 500 and Nasdaq slid 2.2% and 2.9% respectively, as hotter-than-expected US CPI data fueled fears over hawkish central bank policies. On the corporate side, Delta Air Lines shared strong guidance for the last quarter of 2022 amid expectations that travel demand will remain robust despite growing global macro headwinds. Multinational investment group, BlackRock also delivered better-than-expected quarterly results despite tightening financial conditions.
During volatile trade on Thursday, equities in London also turned red, with the benchmark FTSE 100 falling toward the 6 700 mark, its lowest since March 2021. The benchmark was dragged down by heavyweight materials and consumer staples stocks. Prior to the US CPI release, stocks enjoyed some respite as news headlines reported that talks were underway over whether to scrap parts of UK Prime Minister, Liz Truss’s, mini budget that caused significant market turbulence. Global specialty chemical manufacturer, Croda International, and Spirax-Sarco Engineering were among the biggest laggards on the index, down roughly 6% each. Meanwhile, British homebuilder Taylor Wimpey lost 5.2% as it traded ex-dividend.
European stock markets tumbled over 1% on Thursday afternoon. Earlier in the session, stocks pivoted between red and green, following the release of a batch of corporate earnings and reports that talks were underway over whether to U-turn on the UK’s mini budget. On the corporate front, chip stocks fell after chip-making technology supplier, Applied Materials, cut its profit estimates, despite Taiwanese chipmaker, TSMC, posting its strongest profit growth in two years. While Aroundtown, dropped more than 6% after Citigroup downgraded the real estate group’s stock to “neutral” from “buy”. The pan-European STOXX 600 was down 1.2% and Germany’s DAX 30 lost 1% towards two-year lows.
The JSE FTSE All Share index reversed early gains and sank nearly 1% on Thursday afternoon, tracking its global peers on the back of a hot US inflation print. Domestically, South African labour unions at the national ports and freight-rail operators rejected a revised wage offer and said they plan to intensify strike action. On the corporate front, tech stocks, industrials, and resource-linked companies were trading in the red, while financials posted marginal gains.
DIRE GROWTH OUTLOOK DAMPENS COMMODITIES
Copper futures plummeted below $3.40/pound on Thursday, extending losses from the prior session and approaching the two-month low of $3.30/pound reached on 27 September, as signs of an increasingly dire global macroeconomic backdrop continues to hamper demand for industrial inputs. Meanwhile, fears of additional lockdowns in China – as COVID-19 outbreaks in major cities gathered momentum, driving the Chinese governments to impose large-scale testing until mid-November – also dampened sentiment. Copper prices were further hampered by the International Monetary Fund (IMF) downgrading its 2023 growth forecast for the global economy, citing high inflation, tighter financial conditions, Russia’s invasion of Ukraine and the lingering COVID-19 pandemic.
Brent Crude futures extended losses to trade below $92/barrel on Thursday, retreating for a fourth consecutive session, as the hotter than expected US CPI data dealt a blow to demand expectations. The Organization of Petroleum Exporting Countries (OPEC) slashed its global oil demand growth forecasts on Wednesday for 2022 and 2023 by 460 000 and 360 000 barrels/day respectively, citing high inflation, stalling growth in developed economies, and China’s COVID-19 lockdowns. The US Energy Department also lowered its expectations for US and global consumption, seeing US consumption rising slightly by 0.9% in 2023 from a previous forecast of 1.7%, while projecting global consumption to increase just 1.5% from an earlier forecast of 2%.
Gold prices slumped by over 1% to trade at a two-week low of $1 655/ounce on Thursday setting sights on 2.5 year low of $1 620 witnessed on 26 September, as the dollar resumed its climb.
DOLLAR CONTINUES ITS BARRAGE
The US Dollar Index soared to above 113.8 on Thursday, approaching its highest levels in 20 years, yet again, as the hotter-than-expected CPI report bolstered views of higher US interest rates. The dollar continued to benefit from robust safe-haven demand as well, as the US economy remained resilient in the face of slowing global growth and heightened geopolitical tensions.
The euro also felt the pinch, retreating to below $0.97, on the back of the bolstered dollar. In Europe, investors anticipate that the European Central Bank will hike rates by large increments in the October and December meetings, but the pace of the rate-hike cycle next year could slow as a recession looms.
The British pound rose for a second consecutive day to trade at $1.12 on Thursday, as investors await developments on the Bank of England’s (BoE’s) quantitative easing programme and the mini budget. Sky News reported that talks are under way over whether to reverse parts of the mini-budget, although Chancellor of the Exchequer, Kwasi Kwarteng, has been reiterating his tax-cutting agenda. Meanwhile, the BoE confirmed on Wednesday that its emergency bond-buying scheme will end on Friday, as expected. Earlier, the Financial Times reported that the BoE had signaled privately to bankers that it could extend its emergency bond-buying program, which has confused some investors.
The rand is trading at R18.19/$, R17.80/€ and R20.59/£.