Central Banks need to slow the pace of interest rate hikes for financial stability

October 31, 2022

Economic data Friday showed that US labor costs rose significantly in the third quarter. Still, private sector wage growth slowed, indicating that inflation has either peaked or is close to it. This coincides with recent statements from Fed officials that the US Central Bank may be less aggressive in future Fed meetings. Hedge fund analysts agree and point out that the US Fed will be forced to slow the pace to avoid financial instability. At the close of the stock market on Friday, the Dow Jones Index (US30) increased by 2.49% (+5.37% for the week), and the S&P500 (US500) added 2.46% (+3.70% for the week). The NASDAQ Technology Index (US100) increased by 2.87% on Friday (+2.17% for the week).

Nearly half of economists believe the international impact of a strong dollar is very likely to affect the US economy over the next 18 months and affect monetary policy. Only 28% of economists believe that a stronger currency is unlikely to have any impact on the economy. The dollar has risen about 13% this year against other major currencies amid geopolitical tensions following Russia’s invasion of Ukraine and the Fed’s aggressive interest rate hikes to combat inflation, which have reached a 40-year high. A stronger dollar tends to curb inflation by lowering the cost of imports and domestic production, as it raises export prices. Fed officials are expected to continue their campaign and raise rates another 75 basis points on Wednesday, but the rate of increase will slow down further. The latest forecast is for rates to reach 4.4% by the end of the year and 4.6% in 2023.

The third-quarter earnings season is halfway through, and the week ahead will test whether stocks can continue to withstand the disappointing earnings.

Equity markets in Europe traded flat on Friday but closed the week in positive territory. German DAX (DE30) gained 0.24% (+2.94% for the week), French CAC 40 (FR40) added 0.46% (+3.24% for the week), Spanish IBEX 35 (ES35) decreased by 0.06% (+3.91% for the week), British FTSE 100 (UK100) lost 0.37% (+1.12% for the week).

Friday’s inflation data showed new record highs for Germany, France, and Italy. Eurozone’s inflation data will be released today. Headline inflation is expected to return to a new high of 10.3% on an annualized basis, while core inflation (which excludes energy and food prices) will remain about the same.

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Klaas Knot of the European Central Bank’s Governing Council spoke in favor of an interest rate hike of 50 or 75 basis points in December, but he added that a decision has not yet been made. The Dutch central banker, one of the region’s most hawkish officials, said the ECB is still in the process of returning the cost of borrowing to a neutral level, at which it neither stimulates nor constrains the economy. With Europe threatened by a recession, ECB officials declined to mention that rate hikes will continue over the next few meetings.

Gold prices fell last week despite a weaker US dollar and lower US Treasury yields as a rally in risky assets prompted traders to avoid defensive positions. But in terms of fundamentals, buying gold in the medium term looks like a promising scenario.

Asian markets mostly declined last week. Japan’s Nikkei 225 (JP225) decreased by 0.47% for the week, Hong Kong’s Hang Seng (HK50) lost 6.49% last week, and Australia’s S&P/ASX 200 (AU200) was down 0.87% for the week.

China’s Central Bank governor promised to keep monetary policy “normal” in the near future amid an economic slowdown caused by repeated Covid outbreaks, a sharp slowdown in the real estate sector, and weakening external demand. China has the conditions to maintain a normal monetary policy and keep the yuan stable for an extended period of time. Experts believe that China will improve the stability of credit growth and continue reducing the cost of credit for businesses and individuals to maintain macroeconomic stability.

In the commodities market, futures on natural gas (+16.96%), WTI oil (+3.92%), Brent oil (+3.01%), and platinum (+1.67%) showed the biggest gains by the end of the week. Futures on lumber (-15.03%), coffee (-9.66%), cotton (-8.87%), palladium (-5.21%), gasoline (-4.28%), sugar (-4.08%) and wheat (-2.41%) showed the biggest drop.

S&P 500 (F) (US500) 3,901.06 +93.76 (+2.46%)

Dow Jones (US30) 32,861.80 +828.52 (+2.59%)

DAX (DE40) 13,243.33 +32.10 (+0.24%)

FTSE 100 (UK100) 7,047.67 −26.02 (−0.37%)

USD Index 110.67 +0.08 (+0.07%)

Important events for today:

– Japan Industrial Production (m/m) at 01:50 (GMT+2);
– Japan Retail Sales (m/m) at 01:50 (GMT+2);
– Australia Retail Sales (m/m) at 02:30 (GMT+2);
– China Manufacturing PMI (m/m) at 03:30 (GMT+2);
– China Non-Manufacturing PMI (m/m) at 03:30 (GMT+2);
– German Retail Sales (m/m) at 09:00 (GMT+2);
– Switzerland Retail Sales (m/m) at 09:30 (GMT+2);
– Eurozone Consumer Price Index (m/m) at 12:00 (GMT+2);
– Eurozone GDP (q/q) at 12:00 (GMT+2);
– US Chicago PMI (m/m) at 15:45 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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Central Banks need to slow the pace of interest rate hikes for financial stability