Hey everyone, the markets are currently at a major conjunction. Over the next few weeks we will get a more solid footing on where the Feds will take rates against the backdrop of possibly peak inflation. Get my take here in this week’s round-up.
WEEKLY SOUND BITES:
Major indexes moved higher breaking a string of three weekly losses, as investors appeared to grow more confident that the market had reached at least a temporary bottom after surrendering about half of its summer rally. Fed Vice Chair Lael Brainard and Cleveland Fed President Loretta Mester also delivered comments that seemed to be more “dovish” than markets expected, with Brainard stating that she still believed the economy could avoid a recession as the Fed raised rates. Traders also noted that signs that inflation was cooling quicker than expected also seemed to support sentiment. Stocks rallied after the Wednesday afternoon release of the Fed’s “Beige Book” summarizing economic reports from its branch banks. The report indicated that price increases were moderating in nine of its 12 districts, as “lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates.” The report also noted some declines in prices for steel, lumber, and copper.
On Tuesday, the ISM and S&P Global released widely divergent final readings on August service sector activity, with the ISM gauge upwardly revised to 56.9, the fastest pace of expansion since April. However, the S&P Global measure fell more than expected, to 43.7, the biggest contraction since early 2020. The labor market appeared to remain on solid footing, with weekly jobless claims coming in much lower than expected (222,000 versus roughly 240,000) and hitting their lowest level since the start of the summer.
The yield on the benchmark 10-year U.S. Treasury note jumped to its highest level since mid-June at the start of the trading week.
In Europe, the ECB increased its key interest rates by a record 0.75 percentage point in a bid to curb inflation. The deposit rate now stands at 0.75%, while the refinancing rate sits at 1.25%—their highest levels since 2011. The central bank indicated more rate increases are likely and over the next several meetings the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations. Meanwhile, in the U.K. Prime Minister Liz Truss announced that the government would intervene to help reduce soaring energy costs for British households and businesses. And the BOE indicated in testimony to Parliament that the government’s energy bailout plan could force the central bank to raise interest rates further.
In Japan the stimulus continues. The government announced a new package, due in October, to help the country cope with rising inflation. The package includes cash handouts to low-income households as well as measures to keep some commodity and food prices at current levels. The yen’s fall to its lowest level in 24 years prompted fresh comments from Japanese officials indicating the government did not rule out any options on foreign exchange moves. And we see that GDP expanded at an annualized rate of 3.5% in Q2, higher than the preliminary estimate of 2.2% growth. The economy was boosted by the lifting of coronavirus restrictions, which encouraged business spending and private consumption.
China’s consumer and factory gate inflation in August declined from July’s levels and came in below analysts’ expectations. Consumer prices rose 2.5% over the 12 months ended in August, while factory gate prices rose 2.5%, down sharply from 4.2% the previous month. On Friday, the People’s Bank of China (PBOC) set firmer-than-expected guidance for the yuan exchange rate against the U.S. dollar for the 13th straight trading day, a move viewed by analysts as part of the government’s efforts to slow the pace of the currency’s depreciation.
Enjoy this Week’s Round-Up
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