Tightening across the globe
The content of this document is for information purposes only and is not to be used or considered to be an investment recommendation, or an offer or solicitation to buy, sell or subscribe to any securities or other financial instruments. It does not take into consideration the specific investment objectives, financial and fiscal situation or particular needs of the addressee. It reflects PNAA’s beliefs based on its own views of the direction of the global macroeconomic market, its investment process and other relevant factors.
Highlights
Yen intervention
On Thursday, the Bank of Japan (BoJ) kept its dovish forward guidance and yield-curve-control framework unchanged, highlighting a willingness to cap a rise in interest rate. Few hours later, the Ministry of Finance (MoF) intervened in the FX market to curb the yen’s weakness, highlighting a willingness to cap the yen’s depreciation. The latest FX intervention to curb yen’s weakness was in April-June 1998.
Market update
Tightening across the globe
The S&P 500 closed the week at 3,693.23, -4.65% lower. The Dow Jones closed at 29,590.41, -4.00%, with the Nasdaq lower by -5.07%. The volatility index VIX closed the week at 29.92 up from 26.30. The Euro Stoxx 600 slipped -4.37%.
The 10-year UST closed at 3.68% up from 3.45% a week before. The yield curve steepened with the yield spread between the 3-month and 10-year UST at +49bps. US Corporate Bond spreads: Investment Grade tightened 1bp at 188bps and High Yield tightened 5bps at 532bps. German 10-year Bunds yield closed at +2.02% up from +1.76% a week before. In Europe, Corporate Investment Grade spreads widened 3bps at 216bps and High Yield spreads widened 13bps at 609bps.
The US Dollar Index (DXY) appreciated +3.12% last week and closed at 113.19. The Euro closed at 0.9687 (-3.28% weekly); the Yen depreciated -0.27%, closing at 143.31 and the Swiss Franc depreciated -1.74%, closing at 0.9818. Gold closed at $1,643.94 depreciating -1.86%. Oil was down, Brent closed at $86.15 (-5.69%) and WTI at $78.74 (-7.48%).
Macroeconomy
FOMC meeting
The FOMC (Federal Open Market Committee) hiked its policy rate by 75 bps as expected. The new target range is 3.0-3.25%. The hawkish surprise was the rates forecast or “dot plot”. The end-2022 rate was raised to 4.4% and the end-2023 rate forecasted at 4.6%. The market consensus pre-FOMC was closer to 4.3-4.5% in 2023 with the peak at 4.5/4.6% by March 2023. Inflation-fighting remains the main priority, and the labor market is still too much “out of balance” in the Fed’s view. Powell still mentioned that the pace of hikes could slow but he acknowledged the current forecast is for 100 to 125bps of additional tightening by year’s end based on current data. Inflation by the Fed's preferred measure, the personal consumption expenditures price index, is expected to be at 5.4% in the 4Q22 before cooling to 2.8% in 4Q23. By the end of 2024 the Fed see inflation at 2.3%, easing to its 2% target by the end of 2025. Still the longer-term FOMC rate expectations stand at 2.50%.
SNB
The Swiss National Bank (SNB) hiked its main policy rate by 75bps to +0.50%, in line with expectations, ending the 7-year era of negative interest rates. Swiss inflation, at 3.5% y-o-y in August, is still above the upper band of the SNB’s 2% target and is expected to decline only gradually. The SNB statement mentioned that “it cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future”. In addition, the SNB is still willing to favor a strong Swiss Franc to mitigate imported inflation. Another important decision taken was on the remuneration of bank deposits using the SNB’s tiering system in reverse. Indeed, sight deposits are now renumerated at the policy rate (+0.50%) up to the threshold of 28 times the reserve requirements. Above this level, sight deposits are renumerated at 0%. The SNB’s forecasts for inflation were revised higher, to 3.0% on average in 2022 and 2.4% in 2023, falling below 2% by late 2023. The growth outlook was more pessimistic due to the energy situation, the loss of purchasing power, and tighter financial conditions.
BoE
Last week, the Bank of England (BoE)hiked rates by 50bps as expected. The new rate is 2.25%. The tone was hawkish as the BoE warned that more fiscal spending could lead to more forceful tightening. The BOE confirmed that it will continue the planned quantitative tightening, where bonds from the asset portfolio will be sold. At the same time, the UK government announced a tax cut plan to lower taxes for households and corporates, with the aim to re-energize business activity (and ultimately tax receipts). The Institute for Fiscal Studies says the tax cuts are the biggest in the UK since 1972. The government also announced it will establish an ‘Energy Price Guarantee’ designed to cap spiraling energy costs for households and businesses. This measure could potentially cost GBP150 bn, although it hopes to keep that off-budget. The government has raised its annual debt issuance plan by a substantial GBP 72bn (to GBP 234bn) in fiscal year 2022-23. The British pound reacted negatively closing the week at 1.0859 after depreciating -4.91% over the week.
Other central banks
Both the Riksbank and the Norges bank hiked aggressively their policy rates (by 100bp and 50bp respectively). However, the communicated terminal rates have been below market expectation. This may suggest a more gradual approach to policy rate setting ahead. In those lines, there was a wave of monetary tightening, with 10 central banks across the world announcing a cumulative 600bps worth of rate hikes. The current monetary tightening cycle began at the end of 2021 in reaction to rising inflation. This year, 80% of the world’s central banks have collectively pushed through more than 150 rate hikes. Last week’s action meant the average policy rate around the world reached 4.4%, a level not seen since 2008.
Economic data
US existing home sales dropped by 0.4% in August compared to the previous month and by 19.9% from a year earlier. While median prices for existing homes slipped m-o-m, they were still 7.7% higher than in August 2021. While housing starts were up in August, building permits fell by 10% on the previous month. Regarding PMIs, S&P Global flash composite PMI for the euro area declined to 48.2 in September, with services stronger than manufacturing. The composite PMI for Germany slid to 45.9 in September. In the UK, the composite PMI dropped to 48.4 from 49.6 in August.
What to watch
- Monday: US ISM manuf. index (Apr.)
- Tuesday: Australia RBA decision (May); Euro area: final PMIs, M3 (Mar.), Bank Lending Survey (Q1), flash HICP (Apr.); US durable goods (Mar.)
- Wednesday: US FOMC decision (May); US ISM non-manufacturing index (Apr.)
- Thursday: Norway Norges Bank decision (May); Euro area ECB decision (May); US trade balance (Mar.)
- Friday: Germany factory orders (Mar.); US: nonfarm payrolls (Apr.)