A particularly sad and sombre end to the week last week for many following the death of Queen Elizabeth II, the UK’s longest reigning monarch.
Last week was the first full week back for US markets following the Labour Day holiday last Monday. Markets continue to tread carefully ahead of further central bank policy meetings.
Following the passing of Queen Elizabeth II, the Bank of England will not be meeting this week as the UK remains in mourning until after the Late Queen’s funeral on Monday 19th September, which will be a bank holiday here in the UK.
Review of last week’s key action
FTSE +70 +0.96% DOW +833 +2.66% S&P +143 +3.65% NASDQ +481 +4.14% DAX +38 +0.29% NIKKEI +563 +2.04% Hang Seng -90 -0.46%
Global markets had a better week last week following three weeks of declines in equities. The risk-on move last week was modest and suggests it is a pause whilst markets digest the recent moves by the European Central Bank (ECB), Reserve Bank of Australia (RBA), and Bank of Canada, as they all raised rates as the battle against inflation hots up. The RBA was the only bank not to raise by 0.75%, raising them by 0.5% and said the pace of rate rises may slow.
US markets rallied from midweek last week despite some quite hawkish comments from Jay Powell, the Chairman of the Federal Reserve. Powell said that that the central bank needed to “act forthrightly” on inflation and “keep at it until the job is done.” Not surprising because Powell, along with many central bankers failed to act in a timely fashion when inflation was stirring in H2 last year.
Forward market pricing suggests there is a 70% probability of US interest rates hitting 3.75% - 4% band by year end. That is in marked contrast to 0 – 0.25% in March as the battle against inflation erupted. Further data will be released this week on that battle against inflation. In the Eurozone, the ECB raised interest rates by 0.75% as most market participants expected. The belated hawkish comment from the ECB suggests the market could expect another 0.75% hike in October. In July, the ECB raised rates by 0.5%, the first hike in rates in over a decade.
In the UK, the new administration announced a massive plan to support residential customers from further price shocks by committing to keep average household bills at no more that £2,500 per annum – that is double from where they were a year ago but considerably less than where analysts expect energy prices could go. The costs to the UK treasury could be £150bn and may well pressure UK Bonds and Sterling in the months ahead.
EURUSD +0.91 +0.92% GBPUSD +0.79 +0.69% USDJPY +2.49 +1.77%.
A risk-on move last week saw the US Dollar give some ground back following further gains the previous week. The ECB rate decision had negligible impact with the move just a modest correction following persistent US Dollar gains over recent weeks.
Sterling also managed to claw back some of its losses as the new UK government announced its plans to help energy customers. The scale of the package could reach £150bn depending on where energy prices go, so bond traders were a little on edge. The double-edged sword is that by capping energy rises this way it reduces expected inflation rate by several percentage points.
Gold +3 +0.17% UK OIL -0.96 -1.03% US OIL -0.88 -1.01% Bitcoin +1,310 +6.56%
A further example of this risk-on move last week with US Dollar based commodities all posting modest gains. Crypto assets were relieved to see stocks rally, with the NASDAQ gains helping push Bitcoin up over 6%.
Data / events for the week ahead
Another busy calendar this week with US & UK inflation readings the
most keenly anticipated releases. As mentioned previously, the MPC
meeting this week has been postponed until September 22nd, due to
the period of mourning for the Late Queen Elizabeth II.
China: Bank Holiday - Mid-Autumn Festival. And those not so tasty moon cakes.
US: CPI – Inflation reading. Expect a decrease from last month’s better than expected reading – with 8.1% Year on year reading, down from 8.5% last month. Whilst better, the fall is unlikely to deflect the Fed from its path and the more hawkish stance underlined by Powell in his speech last week. The core reading, which excludes food and energy, is not expected to have slowed much which is more of a concern. US Dollar, global equities, and bonds all sensitive.
UK : The UK CPI is expected to remain unchanged from the previous month’s reading of 10.1%. GBP, UK equities and Gilts extremely sensitive. sensitive.
US: PPI - Producer Price Index – The costs of goods and services going into production. A leading indicator of sorts for inflation.
US: Core retail sales. Still patchy with a fall expected from the previous month’s reading.
US: Empire State manufacturing Index. Proved to be quite volatile over the past three months. Last month’s surprise fall is expected to correct albeit still negative.
UK: Retail Sales. Continuing to slow as inflation bites. Consumers at least know their energy bills are now capped. Seeing is believing, so those than can barely afford any further rises in energy will want to see the impact.
US: University of Michigan Consumer Sentiment – Sentiment has been a downward path for months but there are signs the consumer is perking up. A good leading indicator of future economic activity.
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