Stocks sell off as central banks tighten rates. Markets continue to spin how the various actions of the central bank are spent. Treasury yields fell further in the belly and long end after solid claims data. The 10-year rate is up 11.5 basis points at 3.644%, the most since 2011. The two-year rate is up nearly 4 basis points at 4.086%, although it was at an overnight peak of 4.125%. Yesterday’s close of 4.05% was the first time since October 16, 2007, the 4% mark. The curve is at -45 bps, but the inversion deepened overnight to -57.9 bps, not seen since 1981.
The USDIndex also reversed its overnight profit-taking rally as it plunged 110.77 from the top 111.81, which was better than a 20-year high. The Dollar bill lost ground against the yen after the BoJ intervened to offset continued policy stance USDJPY climbed to a 24-year high at 145.899.
The Combat was odd today when he decided to keep policy set at zero while elsewhere the wave of rate hikes continued. The Fed Yesterday’s increase of 75 basis points was followed by tightening in places like Indonesia, the Philippines, Switzerland and Norway. In Europe, the SNB and Norges Bank raised rates by 75bp and 50bp respectively, while the BoE ultimately stayed at 50bp, putting fresh pressure on Sterlingbut he helped UK100 overcome.
eurozone bonds are supported as markets weigh recession risks on the back of aggressive central bank moves. The ECB’s Schnabel reiterated that the slowdown in growth will not prevent further tightening, and that seems to pretty much sum up the message from most central banks. The short end of the curve is weaker in this environment, with two-year rates jumping 6.4bp in Germany and 8.7bp in the UK.
Japan intervenes in the foreign exchange marketafter policy divergence puts pressure on yields. Japan intervened in foreign exchange markets for the first time since 1998. Japan’s top currency official Masato Kanda said: “The government is concerned about excessive movements in foreign exchange markets and we have taken decisive action right now”. The comments came after the BoJ’s decision to stick with an ultra-accommodative policy setting put more pressure on the yen and saw USDJPY rise above 145. Markets had been speculating on the risk of intervention for some time, but there was a sense that Japan would try to ask for US help first. Kanda said today that “we see speculative moves behind the current sudden and unilateral movements in the foreign exchange market.”
Bank of England
The BoE is on hold with a 50bp increase in a partial vote. The central bank raised the key rate by another 50bp to 2.25%, in line with consensus expectations. A move of 75 basis points would not be a surprise today, especially after yesterday’s hawkish Fed announcement and as the new government embarks on a series of stimulus measures.
The fact that Prime Minister Truss is launching a series of tax cuts to boost the economy while curbing energy bills has complicated the BoE’s situation. In the end, only 3 MPC members opted for a move of 75 basis points, 1 wanted a smaller increase of a quarter point and 5 opted for another half point move. Today’s increase left Bank Rate at 2.25% and further tightening is on the cards. The Pound Struggling after a 50bp move, Cable slipped back below 1.13 as markets raised bets for a 75bp rise this week.
The BoE flagged downside risks to the economy and now expects GDP to fall by -0.1% in Q3, which would leave the economy in a technical recession after the decline in Q2.
Looking ahead, the MPC reiterated that policy is not on a predetermined path and that future actions will depend on an assessment of the economic outlook and inflationary pressures. At the same time, however, the statement emphasized that “should the outlook indicate more sustained inflationary pressures, including stronger demand, the Committee would respond vigorously as appropriate.” Coupled with the fact that already today there were three members of the MPC who wanted a bolder move, and that even the one who opted for a quarter-point hike saw it as a half-point move, it seems likely that another big increase in the Bank Rate is on the cards for November. .
This will not go down well with the government, as will the BoE’s confirmation that it will continue with a plan to reduce the stock of assets accumulated under the quantitative easing program. The BoE intends to sell around £80bn over the next 12 months. As the government will need to fund the energy price guarantee and tax cuts, this will mean that the markets will have to absorb a significant amount of sterling bonds.
Norges Bank raised rates by 50 bp and signals that more are to come. The central bank increased the base interest rate to 2.25% from the previous 1.75%. The move was widely expected, with the statement indicating that “the policy rate is most likely to be increased further in November”. The bank stressed that inflation had risen faster and to a higher level than expected, while the labor market remained tight, although “there are now clear signs of the economy cooling”. “Easing pressures in the economy will contribute to further curbing inflation” and as previous rate hikes begin to have a tightening effect, “this may suggest a more dovish approach to rate-setting going forward.” The bank said the projections in today’s report are based on an increase in the key interest rate to around 3% over the winter, which would mean another 75 basis points at the next meetings. “Future interest rate developments will depend on how the economy develops, and our projections are more uncertain than usual.” “If there are prospects that inflation will remain higher for longer than we now anticipate, a higher policy rate may be needed. A sharper decline in inflation and activity than currently projected may reduce the need for rate hikes.
The SNB is offering a 75bp increase as expected. After starting the rate normalization process in June, the SNB raised rates by another 75bp today. This move permanently ended the negative interest rate setting, leaving the base rate at 0.50%. The SNB said the move would counteract “a resurgence of inflationary pressures and the spread of inflation to goods and services that have been less affected so far”. At the same time, the bank stated that further increases “cannot be ruled out” and that in order to “provide suitable monetary conditions, the SNB is willing to be active in the foreign exchange market if necessary.”
In its baseline scenario, the SNB expects only weak global growth, with inflation likely to remain elevated for the time being. In Switzerland, the “short-term outlook has worsened”, with the further outlook “to be shaped by economic slowdowns abroad and energy availability in Switzerland”. For this year, the SNB lowered its growth projection to around 2% with a high degree of uncertainty.
Inflation projections, which assume an unchanged policy rate of 0.50%, call for a headline reading of 3.0% this year, followed by 2.4% in 2023 and 1.7% in 2024. The projections are higher than previous projections that had currency rate -0.25%. , which leaves the door open for further rate hikes.
SNB president Thomas Jordan confirmed that economic conditions “clearly indicate that there is a likelihood of further tightening of monetary policy”. Jordan emphasized that the SNB will do “everything” to achieve its inflation target of between zero and 2 percent, and this may include intervention in foreign exchange markets. The SNB may have matched the Fed’s rate hike, but that alone won’t help the CHF, which has apparently weakened more than central bankers would have liked.
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