Advice & Comments
26 Sept 2022
Policy rates rose further across the G10 (ex-Japan) as central banks ramped up efforts to quash resilient inflation.
Rate hikes of 100bp in Sweden, 75bp in the U.S. and Switzerland and 50bp in the U.K and Norway were implemented this week, amplifying recession fears. The Bank of Japan left its ultraloose policy unchanged on Thursday, setting off a rise in the dollar to its highest level versus the yen since 1998. In response, the Finance Ministry bought yens for first time in 24 years to stem the yen’s depreciation. Japan is now the only country in the world with negative rates.
Focussing on the U.S., a more hawkish than expected Federal Reserve (Fed) meeting was held on Wednesday. The September meeting resulted in the Fed hiking the funds rate by 75bp, while Jerome Powell laid out a hawkish path for further rate hikes, one that would take the policy rate to 4.6% in 2023. The latest Fed dot plot implied that a 75bp hike is the default for November too. In addition, officials cut growth projections, raised their unemployment outlook and Powell repeatedly spoke of the painful slowdown that’s needed to curb price pressures running at the highest levels since the 1980s.
In response to Wednesday’s Fed meeting, U.S. bond yields rose sharply, with the two-year Treasury note reaching a yield of 4.20%, the highest since 2007, and the benchmark 10-year note touching 3.82%, its highest level since 2011. The U.S. dollar strengthened, with the Dollar index reaching a 20-year high.
In somewhat of a surprise this week, Russia’s Putin announced a partial military mobilization on Wednesday, calling up 300 000 reservists to fight in Ukraine. The announcement comes at a time when a sudden counteroffensive from Kyiv resulted in the recapture of thousands of square miles of territory, putting Russia on the backfoot. Following the announcement, protests erupted across Russia. At least 1,300 people were detained on Wednesday for participating in nationwide anti-war protests – with some directly conscripted into the military.
New U.K chancellor Kwasi Kwarteng announced the biggest package of tax cuts in half a century and other regulatory reforms on Friday – which was poorly received by the market. Investors fear a looser fiscal stance may worsen the current inflation backdrop. In the wake of the announcement, the British pound fell close to $1.10, the lowest it’s been since 1985, while the FTSE 100 slumped nearly 2%.
Global stocks recorded a second week of losses as investors reacted to global monetary tightening efforts. All three major U.S. indices ended the week lower, the S&P 500 fell -4.65%, the Dow Jones dropped -4.00% while the tech heavy Nasdaq fared worst, tumbling -5.07%. European shares fell sharply for a second week, the Euro Stoxx 50 declined by -4.34%, while the FTSE 100 dropped -3.01%. Asian markets continue to tumble; China’s Hang Seng suffered a -4.48% drop, while the Nikkei 225 fell by -1.50%. Brent oil prices continued to decline this week, dropping -5.27%, while gold dropped by -1.85%.
Market Moves of the Week
In South Africa (SA), softer fuel prices took the edge off of inflation in August. Headline inflation declined from 7.8% y/y in July to 7.6% y/y in August as expected, while core inflation fell from 4.6% y/y to 4.4% y/y. Food prices jumped by 11.5% y/y, which is the highest rate of increase since February 2017 and well above a five year average of 5.0%. Petrol price inflation started to moderate, owing to a decline in the oil price and crack spreads on refined products. Petrol inflation decelerated to 43.2% (from 56.2% in July), a R1.30/l reduction in the fuel price.A front loaded approach to the rate cycle continues, with the South African Reserve Bank delivering a 75 basis point hike on Thursday. The decision resulted from a split 3-2 vote (with 2 members in favour of 100bp), indicating an incremental hawkish policy shift. The repo rate now sits at 6.25%, with the market expecting a terminal 6.75% policy rate by year end.Load shedding continued to impact SA this week, following severe stage 5 and 6 blackouts. Eskom issued a statement on Friday stating that “The capacity constraints will persist throughout next week, and current indications are that load shedding will be implemented at stage 3 for most of the week.” The power utility has also cautioned that if diesel supplies remained constrained, higher stages of load shedding may be required.Sticking with the electricity theme, SA has signed deals to buy power from three EDF Wind Plants – EDF now has 60 days to reach financial close and the projects could be online by Dec 2024. The Cape Town municipality has issued a tender to build its first grid-connected solar plant in Atlantis, one of a series of measures aimed at ending reliance on Eskom. The facility would start generating electricity in 2024.The JSE fell -4.76% over the week, driven by significant selloffs in the mining (-8.32%) and property (-5.27%) sectors. The rand fell almost 2% on Friday as the U.S. dollar extended gains after receiving a boost from a very hawkish Federal Reserve policy announcement and rising Treasury yields. The rand ended the week at R17.94/$.
Chart of the Week
The following chart shows the course, since the end of May, of the fed funds futures market’s implicit prediction for rates as of this coming February’s FOMC meeting. It took investor’s an awful inflation print last week to finally believe Powell’s message and price in a 4.5% fed funds rate by Feb 2023. Source: Bloomberg