Hey Folks, another wild week as Volatility saw prints over 30 this Friday before dipping back just a bit. Get my take on the markets, interest rates and where we can go from here.
WEEKLY SOUND BITES:
Major indexes recorded a second week of pronounced losses after Federal Reserve policymakers revealed that they expected official short-term interest rates to continue going sharply higher over the next several months. The Dow fell to new intraday lows since late 2020 while the S&P, Russell and Nasdaq managed to stay slightly above their bottoms in mid-June 2022. What really seemed the markets was the survey of Fed policymakers’ individual expectations for future rate increases, which showed that many expect rates to reach 4.4% by the end of 2022 and move towards 4.5% – 4.75% in 2023. Note that the average Fed Funds rate going back to 1954 is 4.6%.
The selling accelerated Friday, seemingly fed by troubling developments in Europe despite some modestly encouraging economic data. S&P Global reported measures of current manufacturing and services activity surprised on the upside with manufacturing activity expanding to 51.8 from August’s reading, while services activity continued to contract but at a much more modest pace to 49.2 versus 43.7in the prior month. And US Weekly jobless claims rose a bit to 213,000 but would have been flat if the previous week’s number had not been revised down; the four-week moving claims average fell to its lowest point in three months.
Short-term yields briefly jumped in response to the Fed’s latest projections, but the week’s sharpest yield increases occurred Thursday as the moves pushed the two-year U.S. Treasury yields above 4.10%—its highest level since October 2007—and the benchmark 10-year U.S. Treasury yield briefly to 3.77%—its highest mark since November 2008. The Feds voted to raise the federal-funds rate by 75 basis points, to a range between 3% and 3.25%. The last time rates were this high was in 2008, during the Global Financial Crisis. With rates currently at 3% to 3.25% and projected to reach 4.4%, the implication is that the Feds will implement sizable rate increases at their Nov. and Dec. meetings, assuming that inflation data remains elevated throughout this time. There are two key pieces of economic data that have investors worried that inflation may not meaningfully abate in the near future: rapidly rising wages and rising prices outside of food and energy, signaling that inflation is broad-based.
Over in Europe we saw yields on German 10-year government bonds rise to fresh decade highs as central bank rate hikes boosted market expectations for monetary policy tightening at the European Central Bank. The Bank of England (BoE) lifted its key rate to 2.25% as well, hiking by 50 bps for the second month running. Markets had been pricing in the probability of a 75-bps hike in line with the U.S. Federal Reserve. Meanwhile the Eurozone business activity contracted for a third consecutive month in September as the economic downturn deepened, according to purchasing managers’ surveys as if ell to 48.2 in Sept, the lowest level since June 2020. Both the Euro and the British Pound are at multi decade lows against the USD.
Japan intervened in the currency market to support the yen for the first time since 1998 after it fell below JPY 145 to the U.S. dollar by buying the Yen and selling the USD. As expected, the BoJ maintained its ultra-easy monetary policy that includes setting a short-term interest rate at -0.1% and purchasing Japanese government bonds (JGB) to defend the 0.25% cap for 10-year JGB yields. Japan’s core consumer price inflation, which excludes volatile food prices, accelerated to an annual 2.8% in August, the fastest increase since October 2014.
In China the yuan currency fell to a near 28-month low and traded at 7.1066 per U.S. dollar. The Fed’s aggressive tightening has boosted the dollar at the expense of the yuan and other emerging markets currencies this year. The Asian Development Bank was the latest to downgrade its growth estimate for China to 3.3% this year from a prior 4.0% estimate. It also forecast that China’s economic growth would lag that of developing Asia for the first time in more than three decades. Beijing’s official growth target this year is about 5.5%, a level that many economists believe is unattainable.
Enjoy this week’s round-up
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