Podcast: Central Banks pause & Eurozone inflationCreated: 25th September 2023

So, what do we know?

(A forex, index, and commodity market review)

A number of central banks announced their latest interest rate decisions against a backdrop of moderating inflation. However, with core inflation (which excludes energy and food prices) proving more persistent, central bankers face a major dilemma as they adjust policy to cool inflation whilst taking into account the lagged effects of these interest rate rises over the past 18 months.

Weekly change (amount change and percentage change on the week)

FTSE                -37           -0.48%  
DAX                 -375         -2.36%  
DOW               -660         -1.90%        
S&P                 -133         -2.98%   
NASDQ            -489         -3.21%
NIKKEI             -792         -2.37%  
Hang Seng       -20           -0.11% 

Major stock indices stumbled last week following updates from major central banks. The FOMC, the rate setting committee for the Federal Reserve, kept rates unchanged last week as widely expected. Despite the decision to keep interest rates unchanged, both US equity and bond markets fell following the hawkish guidance from the FED, as the FOMC said that it is likely to raise rates again before the end of the year. The comments from the FOMC resulted in a sell-off in both equities and bonds following the meeting, with the yield, (which moves inversely to price) on the 10-year bond hitting a 16-year high at 4.48%.

By Friday close the US 10-year yield backed down slightly whilst the Fed Funds forward rates imply an increase of 5% in the probability over the week of an interest rate hike in one of the two remaining FOMC meetings this year. The probability of a rate hike in December currently stands at 45% (40% end of previous week) which remains at odds with the most recent guidance from the FOMC last week.

There were some surprises from other central banks last week. The Bank of England decided to keep interest rates on hold following what was described as a 50/50 decision; this was the first unchanged decision following fourteen consecutive rate rises since December 2021. Andrew Bailey, the Governor of the BoE, cast the deciding vote following a 4 / 4 split between committee members.
The release of UK inflation the day before set the tone for the MPC meeting, as headline inflation unexpectedly fell to 6.7% versus  a consensus of 7%. Core inflation also fell unexpectedly to 6.2% from 6.9% the previous month, versus a 6.9% consensus. The MPC said that the current rates would need to be maintained for longer until progress had been made in bringing inflation down to the bank’s 2% per cent target. The inflation news and the unchanged rate news helped support  UK shares, especially those interest rate sensitive stocks, despite the backdrop of a sharp retreat in global equities last week.

Two other major central banks also provided some surprise for the markets as the Swiss National Bank (SNB) kept rates on hold, despite the ECB raising rates the previous week. The SNB said that the significant tightening of monetary policy over recent quarters is countering remaining inflationary pressure but warned that a further tightening of monetary policy may become necessary.

The Bank of Japan (BoJ) provided the final surprise of the week on Friday by maintaining the very easy monetary policy with no change to its yield curve control measures. In fact, the BoJ, under its new Governorship of Ueda, said very little which will make the Japanese yen more volatile as its falls last week only encourages more talk of central bank intervention to support the Yen.

EURUSD          -0.10        -0.09% 
GBPUSD          -1.46        -1.17% 
USDJPY            +0.53       +0.35%

The US Dollar continued to rally  last week following the hawkish comments from the Fed with respect to guidance about future rate rises and any potential cuts next year.

Sterling was particularly weak following the unexpectedly better CPI reading with headline and core inflation reading coming in lower than expected. The unchanged move by the BoE helped push sterling to its lowest level versus the US Dollar since 24th March as economists debate whether the BoE have reached the end of current tightening cycle. Despite comments from the MPC and leading economists that interest rates might have peaked, forward rate markets imply a 70% probability of a further 0.25% hike in rates in the next three months. With oil breaking through $90 per barrel, and now targeting $100 level, investors remain more uncertain about future rate rises than a number of the MPC members!

The Japanese Yen fell again versus the US Dollar as the Bank of Japan made no change to its ultra-loose monetary policy. The USDJPY touched levels not seen in 11 months which will inevitably spark intervention worries as the USDJPY reaches the psychological 150 level.

Gold                unchanged
UK OIL             -1.3          -1.39%
US OIL             -0.40        -0.44%

Gold gained early last week but succumbed to the rally in the USD which pressured all USD based commodities.

Oil made another multi month high last week before slipping back on profit taking. The tightness in supplies remains a key feature of this market as investors speculate on a move to the $100 level, last hit in August last year.

What don’t we know….yet?

(What traders need to look out for in the week ahead)

A much quieter week for international markets this week following the deluge of rate decisions last week. Inflation readings in the Eurozone and consumer sentiment readings in the US are the highlights this week.

Monday

Germany                                             German IFO Business climate. Broad survey of manufacturers, builders, wholesalers, services, and retailers. Another modest fall expected as businesses continue to struggle in the Eurozone’s largest economy. EURO sensitive to this release.

Eurozone                                             Christine Lagarde testify before the Committee on Economic and Monetary Affairs, in Brussels. EURO sensitive to any hint on interest rates.

Tuesday

US                                                          CB Consumer Confidence. Confidence is key to spending and economic activity which feeds through to corporate profits has been building  A decline to 105.10 expected. USD and US assets sensitive to this leading indicator.

Wednesday

US                                                          Core Durable goods. Recent data has been better than forecast as demand and consumer sentiment improves.

Thursday      

Germany                                             Prelim CPI. In the run-up to the bloc-wide report on Friday, some states release their individual data. German monthly reading expected at +0.3% as prices continue to moderate. How will inflation and inflationary expectations react to surge in oil price over the past 3 months. See Friday’s Core CPI Flash estimate.

US                                                          Final GDP reading for Q2. The last of three readings. An improvement from 2.1% to 2.3% expected. Data unlikely to impact the market as it is backward looking.

US                                                          Chair of the Federal Reserve, Jay Powell, speaking at a townhall event with educators hosted by Federal Reserve, in Washington DC. Fed watchers on the look out for any hint regarding future rate decisions in the remaining two FOMC meetings this year. US Dollar and US assets on guard.

Friday

Eurozone                                             Core CPI Flash estimates. Consensus is for a fall to 4.6% versus 5.2% in August. If CPI comes in as expected, it would be lowest reading in 2 years.– This data could confirm the end to the present tightening cycle by the ECB. The impact of oil price rise above $90 will impact ECB thinking. Eurozone assets and Euro sensitive to this release.

 

What should we be trading?

(Analysis of the popular markets and what we like)

With all the interest rate activity, the volatility and turning points seem to be affecting the Stock Indices more than Forex at the moment, with notable recent trades on the NAS100. SPX500 and US30. Adrian will review all during today’s Podcast.

 

Category: GENERAL TRADING