Podcast: The end of rate rises? Chinese deflation.

Created: 6th November 2023

So, what do we know?

(A forex, index, and commodity market review)

US equity markets posted the best weekly gains this year as investors cheered the likelihood that interest rates will not be going up again this year. Most market participants now believe that the Federal Reserve has concluded this current tightening cycle and that, whilst interest rates will remain elevated for longer than was expected a few months ago, the next move in rates is likely to be a cut sometime in the latter part of Q2 next year.

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


FTSE           +131       +1.80%

DAX             +577       +3.95%

DOW            +1,692    +5.22%

S&P              +241       +5.85%

NASDQ         +921      +6.49%

NIKKEI          +2,092  +6.82%

Hang Seng   +659  +3.90%


Markets experienced a strong risk-on move last week as equities and bonds rallied sharply whilst the US Dollar suffered its worst loss since early July.

US equity market moves were the most notable, rallying sharply last week as investors and traders reassessed the likely path in interest rates. The S&P500, NASDAQ and Dow Jones all posted their best weekly gains since early November 2022 as Non-farm employment data underpinned the view that interest rates had likely peaked and that rates would start to come down in May or June next year.


The FOMC decision last week to keep interest rates unchanged was as expected. However, comments from Jay Powell, chair of the Federal Reserve, that the central bank was “proceeding carefully” with future rate rises implied to analysts that the task of raising rates was at an end.


The employment data last Friday underpinned that interpretation of an end to the tightening cycle as the data can in weaker than expected on every measure. The number of new jobs at 150K was less than consensus whilst the previous month’s number was adjusted lower by 40K job. On top of this the employment rate ticked up to 3.9%, the highest since February this year, whilst average hourly earnings also dropped to +0.2% versus consensus of +0.3%.

Most analysts believe that the US economy has achieved the goldilocks scenario where rate rises have cooled the economy sufficiently to allow price pressure to abate without pushing the economy into a recession.


As always there are notes of caution, as the chair of the Richmond Fed, Thomas Barkin, was reported saying that it was not clear if rates had peaked yet and that any potential cut in rates was “still a

ways off in my mind”. Jay Powell also reiterated what almost all central bankers are saying that rates may still need to go higher, saying that “the central bank was not confident yet” that monetary policy was sufficiently restrictive to bring inflation back to its 2% target.

This notable caution by Fed members is not surprising because market reaction can result in a stimulus to the economy, especially when considering the reaction in the bond markets. The US sovereign bonds, called treasuries, rallied sharply last week with the ten-year yield touching 4.5%, the lowest yield in a month, whilst the interest rate sensitive 2-year note, fell to 4.8%, the lowest level in over 2 months. This effective cut in borrowing costs will mean lower costs for businesses and retail loans that could further bolster the economy. This is referred to as a soft-loosening of monetary conditions – Something the Fed has no direct control over.

For now, it appears that the Federal Reserve has achieved a balance in price pressures and economic activity that economists will continue to watch very closely should price pressures start to build again. The likelihood of such a scenario remains quite uncertain with two conflicts raging in two regions that could still cause energy costs to rise again.


UK equities also posted strong gains as the Bank of England kept interest rates on hold for the second month in a row. Interest sensitive stocks all benefitted from the unchanged call as the FTSE250 rallied 951 points or 5.6% on the week, the best performance since early November last year. Bank of England governor, Andrew Bailey, warned that rates would stay elevated for longer than some expected, and that growth would remain well below historical averages over the medium term. UK rates are not so clear cut as in the US, with 3 members of the MPC voting for a rate rise, there remains a possibility that rates will have to rise again if price pressures fail to fall near the bank’s target of 2%. If anything, the argument for ECB and Bank of England to not raise rate further is stronger than the US, where economic activity is far stronger.

The Bank of England’s assessment was more bearish than many analysts expected although market expectations need to be influenced to ensure that conditions don’t ease too soon. UK Gilt yields, in keeping with other global bond markets, fell last week with the 5-year down to 4.26% which will come as welcome news for some mortgage holders who have to roll their existing deals onto much more expensive rates compared to 5 years ago.



EUR/USD            +1.66      +1.57%

GBP/USD            +2.55     +2.11%

USD/JPY             -0.27      -0.18%


The US Dollar reacted to the surge in equities and the fall in bond yields, sustaining the biggest weekly fall since early July. The US interest outlook has a direct impact on the US Dollar, which fell sharply last Friday following the non-Farm employment data which clearly implied a cooling in the employment market. To what extent other central banks are close to concluding their interest rate tightening will influence the US Dollar trajectory over the medium term. This initial fall in the US Dollar is as much about a risk-on move rather than about interest rate differentials between the US and its trading partners in the Eurozone, the UK, and the Far East.

Sterling also benefitted from the US dollar weakness but also improved versus the Euro as the likely path for rates in the UK remains less clear.


Gold        -14      -0.69%

UK OIL    -3.69   -4.16%

US OIL    -4.21    -4.95%


Gold did not benefit from the notable fall in the US Dollar which would normally help a US Dollar based commodity such as gold. However, the global macro picture has been more of a driver this past month. The hostilities between Israel and Hamas continue to rage although the conflict has been contained and has not spread to southern Lebanon with the Hezbollah terrorist group, funded by Iran, is based.

Oil remains volatile but also fell for the same reason as the US Dollar, as the risk of an escalation in the middle East looks to be contained for now.

What don’t we know….yet?

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

Following a busy two weeks of data releases, this week is notable for how few major releases are expected. The highlight of week is the US Consumer sentiment data out at the end of the week, Chinese inflation data and the RBA rate decision.

US Day light savings so clocks pushed back one hour in USA and Canada so we are back to the usual 5-houyr differential.


Japan Governor of BoJ in press conference in Nagoya. Possible comments about Yield curve control measures. Japanese Yen sensitive.

UK Construction PMI data. The construction sector activity fell alarmingly last month. Expect a small rebound to 46.1 from 45. GBP sensitive.


Australia Reserve bank of Australia to decide on rates. Close call but bank may well raise rates to 4.35% following 4 successive unchanged decisions. AUD sensitive to this release.


UK Governor of the BoE speaking at the Central Bank of Ireland Financial System Conference, in Dublin. GBP sensitive about remarks regarding path of interest rates.

US Jay Powell, chair of the Federal Reserve, speaking at event in Washington. Clues on rates welcome. USD sensitive.


China CPI and PPI data. China is wrestling with a period of deflation that needs to be avoided. CPI expected at -0.2% and PPI at -2.8%. The lack of inflation may be short lived as PPI continues to recover.

Eurozone ECB Lagarde speaking at the inauguration of the House of the Euro, in Brussels, whatever that is. Rate clues as always the focus for traders. Euro sensitive.

US Jay Powell speaking again. This time at a panel discussion titled "Monetary Challenges in a Global Economy". A little more relevant than the House of the Euro. USD sensitive.


UK Monthly and more importantly, quarterly GDP data. Not great reading for the BoE. GDP q/q expected at -0.1% as previous month expected flat. Backward looking but spell out the challenge the BoE with stagflation a possibility. GBP sensitive.

US Prelim University of Michigan Consumer Sentiment and Inflation expectations. A more interesting release that gives us clues about future economic activity in the US.


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