29 Aug

The US Federal Reserve signals that there will be no pause in rate hikes aimed at lowering inflation

August 29, 2022

By JustForex

Federal Reserve Chairman Jerome Powell signaled at a speech in Jackson Hole that the US Сentral Bank will likely continue to raise interest rates and leave them elevated for a while to suppress inflation, and rejected any idea that the Fed would change course soon. Powell added that lowering inflation to the 2% target is the Сentral Bank’s top priority right now, even though consumers and businesses will feel the economic pain. He reiterated that another unusually large increase in the benchmark lending rate might be appropriate when officials meet next month. Amid these statements, the US stock indices saw a sell-off on Friday. The Dow Jones (US30) decreased by 3.03% (-3.88% for the week). The S&P 500 (US500) fell by 3.37% (-3.28% for the week) at Friday’s close of the stock market. The NASDAQ Technology Index (US100) was down by 3.94% (-3.05% for the week).

Two-year Treasury yields rose on Powell’s statements to 3.44%. Mark Spindel, chief investment officer at MBB Capital Partners, said the strong tone of Powell’s speech points to another big 75 basis point rate hike next month.

In a new report on factors driving Canada’s provincial economies from 2022 to 2024, the nonprofit think tank says growth will come mainly from oil and gas. With regions like Saskatchewan and Alberta leading the way in that sector.

Equity markets in Europe fell mostly on Friday. German DAX (DE30) decreased by 2.26% (-3.71% for the week), French CAC 40 (FR40) lost 1.68% (-2.71% for the week), Spanish IBEX 35 (ES35) fell by 1.51% (-2.75% for the week), British FTSE 100 (UK100) was 0.70% down (-1.63% for the week).

Isabel Schnabel of the European Central Bank’s Executive Board urged policymakers to act decisively to bring stubbornly high inflation back under control and warned against backing down at the first sign that price pressures might be easing. Another ECB Governing Council spokesman, François Villrois de Galleau, said during the same discussion that policymakers must be determined to fight record inflation so as not to be forced to resort to “unnecessarily harsh” interest rate changes later on. The ECB raised rates by 50 basis points in July, and a similar move is scheduled for September 8, but some policymakers have begun talking about even more hikes as the outlook for inflation worsens.

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The UK inflation hit a 40-year high of 10.1% year-over-year last month, and Citigroup Inc. said it could surpass 18% in January. According to consulting firm Baringa Partners, more than half of British households are at risk of energy poverty this winter because of soaring bills. In theory, higher rates should lead to a stronger currency. But the opposite is true for the UK right now. Investors believe that further aggressive increases in borrowing costs, necessary to reduce rising prices, will exacerbate Britain’s economic malaise, putting the country in a worse position than the US and the Eurozone.

The spot price of gas in Europe has once again hit a 5-month high. The price of the nearest TTF futures on the ICE Futures exchange reached $3456 per thousand cubic meters in September. The historical maximum for the gas price in Europe was recorded on March 7, 2022, when the April futures price was $3,898 at one point.

According to the Financial Times, EU foreign ministers are set to suspend the visa agreement with Russia as early as this week.

On Friday, OPEC+ states such as Iraq, Venezuela, and Kazakhstan expressed willingness as part of an alliance of 23 oil producers to step in and restore balance to the oil market. The word “balance” is OPEC+’s key phrase for production cuts, a situation OPEC+ considers necessary whenever oil prices are at risk of falling. But the problem with any OPEC+ production cut is that it will raise not only the price of oil but also the price of gasoline, which the Biden administration is trying hard to prevent. Thus the situation in the oil market remains uncertain. On top of that, Russia is selling its oil at a discount of $30 a barrel to Brent in order to keep its economy running under widespread sanctions and to get money for the war with Ukraine, with China and India being the main buyers of Russian oil.

Asian markets traded without a single dynamic last week. Japan’s Nikkei 225 (JP225) decreased by 0.04% over the week, Hong Kong’s Hang Seng (HK50) gained 3.05% last week, and Australia’s S&P/ASX 200 (AU200) ended the week down by 0.15%.

In China, the real estate market crisis has flared up, and sales have been falling there for several months. Because of this, developers are becoming cheaper to tear down the new building than to keep it. The authorities support the demolition by offsetting the costs. Already 2/3 of developers have gone bankrupt or are at the stage of bankruptcy. According to Citigroup, by cutting key rates in August, the People’s Bank of China (PBOC) may cut banks’ required reserves as early as next month.

In the commodities market, futures on coffee (+12.05%), wheat (+7.63%), corn (+6.23%), Brent oil (+4.01%), WTI oil (+2.8%), and sugar (+2.05%) showed the biggest gains over the week. Futures on gasoline (-5.57%), lumber (-4.85%), platinum (-4.05%), orange juice (-4.04%), and soybeans (-1.61%) showed the biggest drop.

S&P 500 (F) (US500) 4,057.66 −141.46 (−3.37%)

Dow Jones (US30) 32,283.40 −1,008.38 (−3.03%)

DAX (DE40) 12,971.47 −300.49 (−2.26%)

FTSE 100 (UK100) 7,427.31 −52.43 (−0.70%)

USD Index 108.84 +0.37 (+0.34%)

Important events for today:
  • – Australia Retail Sales (m/m) at 04:30 (GMT+3);
  • – US FOMC Member Brainard Speaks at 21:15 (GMT+3).

By JustForex

 

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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