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Week in Review: The Fed Pivots to Tighten Policy

Advice & Comments

31 Jan 2022

All eyes were on the U.S. this week as the Fed’s monetary policy committee held their January meeting.

The Fed left rates unchanged, as expected, but hinted that interest rate hikes were coming “soon”. Chairman Jerome Powell emphasized that the labor market and economy were both in a strong position and that high levels of inflation would likely persist. He therefore didn’t rule out that an interest rate increase could come at every meeting in 2022, starting in March. The overall tone of the meeting was more hawkish than the market expected, causing a market selloff on the day and stock volatility throughout the week. Powell promised again and again to be “humble” and “nimble” and said that the central bank would start to shrink its balance sheet after rate increases begin.

On Friday, the Fed's preferred inflation measure, the core personal consumption expenditures index, rose 4.9% year over year, the largest increase since September 1983. In other U.S. news, the economy expanded at its fastest pace since 1984, growing at a 6.9% annual rate in the final quarter of 2021. This surprised consensus estimates (5.5%) and tripled Q3’s growth of 2.3%, which was held back by Covid-19 restrictions in response to the Delta variant and supply chain disruptions.

It’s earnings season in the U.S. and roughly 33% of the constituents of the S&P 500 Index have reported for Q4 2021. According to data from Refinitiv, 79% of those reporting have beaten expectations, though forward guidance has generally been cautious. Tech titans Microsoft (MSFT) and Apple (AAPL) reported strong figures and rose on earnings and guidance, though they were little changed for the week. Companies also stated that supply constraints were to continue due to chip shortages, but can foresee easing.

Geopolitical issues continued this week, with the situation between Russia and Ukraine intensifying. Russia continues to mass troops, blood supplies and weapons next to the Ukrainian border. However, Russia vowed that it would continue diplomacy. This hasn’t stopped the US Department of State from urging American citizens to leave Ukraine. A big factor at play is whether Russia decides to limit or halt energy supplies to Europe in response to possible sanctions issued if they move against Ukraine.

The IMF negatively revised its global GDP growth forecast for 2022 and hiked its inflation estimate. They stated that the global economy would expand 4.4% this year, down from October's 4.9% estimate. However, the 2023 forecast was raised to 3.8%. Inflation in advanced economies is now estimated to average around 3.9% for the year, up from a prior 2.3% estimate.

Late gains helped the U.S. large-cap benchmarks move higher for the week, after a turbulent couple of days. Expectations for faster monetary tightening weighed on investor sentiment while Energy stocks rallied as international oil prices pushed above USD 90 per barrel. The S&P 500 index edged up 0.77%, while the Dow gained 1.34%, and the Nasdaq managed a 0.01% move. Stocks in Europe felt the pressure with the Euro Stoxx 50 down 2.20% and the FTSE 100 down 0.37%. Asian indexes ended the week in the red, with the Nikkei 225 down 2.92% and Shanghai Composite Index slumping 4.59%. Brent crude rose 1.44%, while Gold dipped 2.50%.

Market Moves of the Week

On Thursday, the South African Reserve Bank hiked its repo rate by 25bp to 4.0% from 3.75%, which was largely in line with consensus. Four members of the Monetary Policy Committee (MPC) voted for a rate hike while one member voted to keep rates unchanged. This came across as surprisingly dovish as the market was expecting a unanimous decision. Nevertheless, given a 3-2 split in favour of a hike in November, the median voter has become more hawkish since. The MPC sees upside risks to its upward-revised inflation forecast of 4.9% for 2022. “In this uncertain environment, policy decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook. The MPC will seek to look through temporary price shocks and focus on potential second-round effects,” Reserve Bank governor Lesetja Kganyago said.

Cyril Ramaphosa’s proposed basic income grant came under fire this week as a panel of economic advisors appointed by the President warned against its implementation, due to the multibillion-dollar cost that would deepen debt and hinder economic growth. In September, Rhamaphosa spoke of a possible basic income grant – which would be the biggest of its kind globally if implemented – to alleviate poverty in South Africa. However, South Africa’s finance minister and various business organizations have stated that the proposal is unaffordable – backing up what was recently expressed by the panel of economic advisors.

The IMF has cut its 2022 growth forecasts for South Africa on the back of a softer-than-expected second half in 2021 and a weaker outlook for investment, as business sentiment remains subdued. Its global outlook report, which was published on Tuesday, revealed that the group now expects South Africa’s economy to grow by 1.9% in 2022. This is down from its October forecast of 2.2%. The group also expects growth to further slow to 1.4% in 2023.

The JSE had a tough week, as risk off sentiment weighed on the emerging market. The All-Share Index ended 1.84% lower, after being dragged down by Resources and Industrials. The Rand weakened this week to end at $/R 15.57.

Chart of the Week

The trend for U.S. outperformance over the rest of the world's stock markets has gone on a while. This can be seen by the white line, formed by dividing the S&P 500 Index by the MSCI ACWI (Ex-U.S.) Index. History suggests that protracted periods of U.S. underperformance can and do happen. After 13 years of persistent U.S. dominance, it would be no surprise if it occurred again. Source: Bloomberg

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