Following on from the ECB’s 0.25% rate rise last week, we have another important week for markets as the Federal Reserve and Bank of England announce their decision on interest rates.
So, what do we know?
(A forex, index, and commodity market review)
Weekly change (amount change and percentage change on the week)
US markets were hampered last week by a stronger than expected Core CPI reading of +0.3% versus a consensus of +0.2%. in common with other developed world economies, the US has found Core CPI stickier that it would like, especially considering the rapid rise in interest rates effected by the Fed over the past 18 months. Headline inflation also ticked higher to 3.7% versus 3.6% expected.
The numbers will continue to worry the Federal Reserve, especially with oil back over $90 per barrel following the extension to Saudi Arabia and Russia’s productions cuts. However, the sticky core inflation will benefit from what is referred to as the shelter inflation component of the overall inflation number. Shelter costs, housing costs such as rents and mortgages, makes up 35% of the CPI reading so is the main driver of the reading. Shelter costs lag headline inflation because shelter inflation takes 9 to 12 months to feed through, largely because rental costs only react to moves in inflation. With headline inflation falling rapidly from the peak of 8.9% in June 2022 it is expected that shelter costs will start to fall faster, easing pressure on both headline and core inflation.
US markets took the worse than expected inflation readings in their stride and were on course for some modest gains on the week, with the successful IPO of Arm Holdings (up 25% on the first day of trading) until Friday’s negative news from TSMC. The worlds largest chip maker, TSMC from Taiwan, reportedly asked its major suppliers to delay the delivery of high-end chipmaking equipment. This undermined the chip sector with the Philadelphia Semiconductor Index falling 3%, which pressured tech stocks in general as the NASDAQ lost 1.6% and the broad S&P500 lost 1.2%.
European markets reacted to the ECB news of a further 0.25% hike in the refinancing rate to 4.5% and the deposit rate to 4%, the highest in the history of the Euro. The decision was a 50/50 call so perhaps not surprising to half the market, but it does tell us something about the ECB, which is totally focussed on beating inflation at the likely expense of economic growth. Recent data suggests the Eurozone is close to going into a mild recession so last week’s rate rise is likely to tip the trading block into a recession. The ECB said that core inflation and the tight labour market were the main reasons for the hike. Following the ECB meeting, some more hawkish members of the ECB committee said that if core inflation remains this sticky, then rates could go up again in December. That was the message but the takeaway from the meeting was that investors believe this was likely the last rate hike in the current tightening cycle.
UK markets reacted to the rise in crude oil prices above $90 and the jump in copper and iron ore prices, as the FTSE100 rallied over 150 points last Thursday, its best day of the year. The mining sector was especially strong with Anglo American up over 5% with Rio Tinto and Glencore up 4.3% and 3.1%. BP, despite losing its CEO last Thursday, also jumped 2.5% in reaction to the rise in Crude prices.
The weaker than expected monthly GDP reading of -0.5% was worse than the -0.2% consensus and may muddy the water ahead of the Bank of England’s policy meeting this Thursday. The fall in sterling was also a contributing factor to a general rise in interest rate sensitive stocks.
The move in the Euro might appear slightly confusing as the rate rise announced by the ECB, which was a 50/50 call, would normally support the Euro. However, investors are wary of the consequences of the surprise rate rise which could tip the trading block into a mild recession. Germany, the blocks most important economy, continues to struggle following the rapid rise in energy costs and the slump in exports to China.
Following the ECB’s decision, the Euro fell 0.8% versus the US Dollar to 1.0631, one of the bigger declines this year, to the lowest level since the 20th of March. Investors are clearly more worried about the impact on the Eurozone economy rather than the threat of a further rate hike by the ECB in December.
Gold +4 +0.21%
UK OIL +3.58 +3.86%
US OIL +3.63 +4.18%
Gold recovered lost ground from earlier on in the week last week, as commodity continued to rise whilst the US Dollar retreated slightly from 10-month highs.
Oil accelerated its move above the $90 per barrel level with UK Oil rallying a further 3.86%, to a 10-month high as the oil market tightness shows no signs of abating.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
This is a key week for both US and UK markets as both the FOMC and MPC are meeting to decide on interest rates. Whilst the UK may not carry the weight of importance that the US does, the bank of England will be closely watched to see how the Bank navigates the effects of the rapid rise of headline inflation, which has affected all major economies albeit to a slightly lesser extent. As with all major economies, the focus has now moved onto core inflation which is turning out to more sticky that many expected. The rise in crude oil above $90 won’t help the mood. Two other central bank policy announcements makes for a busy week on interest rate decisions.
Japan Bank holiday in observance of Respect-for-the-Aged Day
UK Lizz Truss speaking about UK economy at the Institute for Government. A reminder perhaps about why her policies were just not acceptable with international investors that largely finance UK borrowing. A case of political manoeuvring.
China Update from People’s Bank of China rate decision. 1-yr and 5-yr loan rates.
US FOMC interest rate decision. A near certainty of no-change in rates as the data suggests lower probability of a rate rise by year end. Press conference at 7:30pm could be lively. USD and US and global assets sensitive.
Switzerland SNB policy meeting. Expect another hike in rates to 2%. CHF sensitive.
UK Monetary Policy Committee (MPC) of the Bank of England, meets to decide on intertest rates. Despite a growing by minority chorus of analysts and economists arguing for no-change, the market consensus is for a 0.25% hike in rates, to 5.5%. However, the decision is less clear cut than it was in early July when the market was still expecting rates to peak above 6.25%. Expectations are for rates to peak at 5.75%, implying a further additional hike of 0.25% by year end.
If the MPC decides to keep rates on hold, sterling would almost certainly fall.
Japan Bank of Japan interest rate decision. The fourth and final major central bank interest announcement. No change expected from the BoJ under the new governorship of Kazuo Ueda. JPY sensitive to the announcement.
UK Retail Sales. A rebound after last month’s weak data caused by poor weather in July and strikes. GBP sensitive.
Eurozone, UK & US Flash Manufacturing, and service Sector PMI data. A gauge on the health of these two key sectors. A slump in the services sector in Eurozone last month worried investors. The UK and the US also reported weakening services last month. EURO, GBP, and USD markets sensitive to this data.
What should we be trading?
(Analysis of the popular markets and what we like)
In today’s sessions we review recent moves in the US indices, followed by the stellar move higher on the UK100, resulting in a 2.2% profit off the starter limits. We also took a few minutes to explain how we can use our chars to consider alternative targets level for our charts using pivot points, applying the technique to the AUD/JPY and UK100 charts.