The unexpected harsh messaging delivered by the United States (US) Federal Reserve (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 inflation numbers that remain stubbornly high, the Fed indicated that interest 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 we will see a meaningful turnaround in inflation just yet.
DATA IN A NUTSHELL
The Bank of England (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 forecast that inflation will hit a 40-year high of 11% during the current quarter. At the same time, policymakers warned that the UK 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 declined, following an increase in September. Employment dropped at a steeper rate than anticipated.
STOCKS REEL AFTER FED POSITION
US stock futures edged lower on Thursday after the major indices faced heavy selling pressure during Wednesday’s session, following signals from the Fed 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.
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. Whilst the Fed’s hawkish tone spooked the market, the prospect of continuing tightness in the global oil markets 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, having contracted in the previous two quarters. Employment has also 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 pound also weakened, trading as low as $1.11 on Thursday, after the BoE raised rates by 75 basis points, as expected, and said further increases in the bank rate may be required for a sustainable return to the inflation target, albeit to a peak lower than priced into financial markets.
The pound started the day trading at 1.1164/$ and 1.1442/€.
Written by Citadel Global Director, Bianca Botes
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