Weekly Wrap: A week of rate hikes

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Written by Citadel Global Director, Bianca Botes.

This week markets shifted their attention to the interest rate decisions of three major central banks, the United States (US) Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE). Investors are weighing the probabilities of an imminent global economic slowdown.

Key themes for this week include:

  • Fed, ECB and BoE hike interest rates
  • Wall Street rallies on improved risk appetite
  • A less hawkish Fed boosts gold prices
  • Dollar continues to trade near nine-month lows

ONE WEEK, THREE HIKES

This week, participants across financial markets waited with bated breath for the latest round of interest rate hikes from the Fed, the ECB and the BoE. While the rate hikes were largely aligned with market expectations, participants paid close attention to the tone of announcements from officials. Investors are looking for clues of what markets can expect in the upcoming months.

The Fed took to the stage first on Wednesday, with its rate-hike announcement. The US Central Bank raised the target range for the fed funds rate by 25 basis points from 4.5% to 4.75% in its February meeting, which was in line with market expectations. This was the second straight meeting where the Fed dialled back the size of the rate increase. The decision pushed borrowing costs in the US to their highest levels since 2007. Policymakers noted ongoing increases in interest rates are still considered appropriate to attain a level that is sufficiently restrictive, as they attempt to return inflation to 2%. During the press conference that followed the announcement, Fed Chair, Jerome Powell, yet again, reinforced that the disinflation process is in a primitive stage and that interest rates are not yet at a sufficiently restrictive level. When questioned about future hikes, Powell noted that the Fed will consider the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments, to determine the appropriate measures. Financial markets, however, saw the announcement and comments as less hawkish, and took the opportunity to increase risk appetite.

On Thursday, the BoE made its announcement. Policymakers from the Central Bank voted by a majority of seven to two to hike interest rates by 50 basis points to 4% during its February meeting, pushing the cost of borrowing to its highest level since late 2008. The hike marked the 10th consecutive increase in interest rates, as policymaker seek to combat high inflation, and this, despite the risk of an expected economic recession this year. Meanwhile, the Central Bank moved away from its stance to keep increasing rates “forcefully” and noted that inflation had probably peaked, suggesting that the BoE might start slowing the pace of rate increases in the near future. Currently, the Bank is expected to hike rates to around 4.5% by mid-2023 and taper back to just over 3.25% by 2026. Consumer price index inflation is projected to fall to around 8% by mid-2023, and to around 4% towards the end of the year. Policymakers have also projected a much shallower contraction than previously estimated.

Following hot on the heels of the BoE, the ECB also moved to raise interest rates on main refinancing operations by 50 basis points, to 3% during its February meeting, also pushing eurozone borrowing costs up to their highest level since late 2008. The Central Bank also pledged a further 50 basis point rate hike at its next monetary policy meeting in March. The ECB reiterated the need stay on the hiking course, and to hike rates significantly at a steady pace. Policy makers are keeping rates at levels that are sufficiently restrictive to ensure a timely return of inflation to the Bank’s medium-term target of 2%. Officials also announced the Asset Purchase Programme portfolio would decline by €15 billion per month, on average, from the beginning of March until the end of June 2023, and the subsequent pace of portfolio reduction would be determined over time. The interest rates on the marginal lending facility and the deposit facility were also increased to 3.25% and 2.5% respectively.

DATA IN A NUTSHELL

The US employment cost index for wages, increased by 1% quarter-on-quarter in the fourth quarter of 2022, after a 1.3% rise in the previous period. Wage costs rose in both state and local government. Meanwhile, the number of Americans filing new claims for unemployment benefits fell by 3 000 from the previous week to 183 000 on the week ending 28 January, its lowest level since April, and well below market expectations of 200 000. The result further consolidated evidence of a tight labour market, despite elevated tech layoffs and the Fed’s tightening path.

The consumer confidence indicator in the euro area was confirmed at -20.9 in January, its highest level since February 2022, on hopes of lower energy prices and that recovery fund spending might help to avoid a recession this year. Consumer confidence in the European Union also saw an improvement. Consumers are more optimistic about the general economic situation of their respective countries, their future financial position, and their ability to make large purchases, while views on their household’s past financial situation remained stable.

Chinese industrial profits declined by 4% year-on-year to ¥8.40 trillion in 2022, after a 3.6% drop the previous period, reflecting the ongoing impact of long zero-COVID measures and a deepening property downturn. The latest result came amid weak profit reports from the private sector and despite an acceleration in profits of state-owned industrial firms, 3% and 0.5% respectively. Among the 41 industries surveyed, 19 saw a decline in profit. The Chinese Caixin General Manufacturing PMI (purchasing managers index) edged up to 49.2 in January from December’s three-month low of 49, but fell short of market consensus of 49.5. Output fell the by its slowest pace in five months, while the decline in new orders slowed. Buying levels dropped at their slowest pace in three months. Foreign demand remained weak, falling for the sixth consecutive month. On the employment front, employment sank for the tenth month running, while the backlogs of work went up for the first time since May 2022. Delivery times improved notably, even though supply chain logistics have not yet fully recovered.

South Africa’s private sector credit accelerated by 7.7% year-on-year in December 2022, missing market expectations of 8.2% and slowing from an 8.3% gain in the previous month. This marked the eighteenth consecutive month of growth in private sector credit but its softest pace since July. Meantime, expansion in the broadly defined M3 measure of money supply increased by 8.66% in December, less than market expectations of 8.9% and easing slightly from an 8.76% increase a month earlier. The seasonally adjusted ABSA Purchasing Managers’ Index was at 53 points in January, remaining close to flat, following the seven-month high of 53.1 in December. The latest reading pointed to the third successive month of modest expansion in South Africa’s manufacturing activity, supported by growth in business activity and inventories. This despite rolling power cuts.

RISK APPETITE BOLSTERS EQUITIES

Stock futures contracts tied to the Nasdaq 100 and the S&P 500 rallied 1.6% and 0.7%, respectively, bolstered by strong results from social media platform Facebook’s parent company, Meta. The social media giant jumped almost 20% in premarket trading after reporting stronger-than-expected fourth quarter revenue and announcing a $40 billion stock buyback. Underperforming its peers, futures on the blue-chip Dow Jones dropped 0.1% as investors reassessed the outlook for US monetary policy. The market movement followed the Fed’s decision to slow down the pace of its rate hikes and delivering a modest 25 basis point hike on Wednesday.

Equities in London looked set to trade in the green on Thursday, after two sessions of losses, with the FTSE 100 bouncing back above 7 800 points, driven by gains in real estate and consumer discretionary stocks. The BoE raised interest rates by a widely expected 50 basis points to 4%, but like its US counterpart, sounded more dovish, noting that inflation has probably peaked. On the corporate side, JD Sports Fashion jumped almost 9% after the retailer outlined its strategic focus for the next five years, including plans to open 250 to 350 new stores every year. In other corporate news, petroleum giant, Shell, posted a record annual profit for 2022, as a result of soaring oil prices and robust demand since Russia invaded Ukraine almost a year ago.

European bourses got some much-needed relief on Thursday, with the benchmark DAX 40 adding more than 1% to an almost one-year high of around 15 400 points, driven by gains in the real estate sector. The ECB raised interest rates by a widely expected 50 basis points, to 3%, while hinting at a similar hike at its next monetary policy meeting in March. On the corporate front, Deutsche Bank reported its tenth consecutive quarter of profit.

Japan’s Nikkei 225 Index rose 0.2% on Thursday, extending gains from the previous session and taking cues from a positive lead on Wall Street. Technology stocks led the charge, with strong gains from SoftBank Group, Tokyo Electron, Keyence, Advantest and Renesas Electronics.

The local JSE FTSE All Share index trimmed early gains to close around 0.4% higher at 79 817 on Wednesday, after two straight sessions of losses. Bid Corporation was the standout performer, surging 6.57%, after the food service firm said it expected its half-year profit to rise as much as 49%. Also, miner, Harmony Gold, rose 2.76%, after saying that it was on track to achieve its full-year production target, despite the power shortages afflicting many businesses in the country. Financials were among the other top performers. Meanwhile, investors continue to monitor the earnings season and more economic data from major economies.

GOLD BOOSTED BY SOFTER RATES OUTLOOK

West Texas Intermediate crude futures rose to trade near $77/barrel on Thursday following the Fed’s moderate rate hike and more dovish stance. This pushed the dollar lower, making greenback-priced commodities cheaper for foreign buyers. On the supply side, a meeting by a committee of the extended Organization of the Petroleum Exporting Countries, OPEC+, recommended keeping crude production steady, citing uncertainty about the impact of China’s economic reopening and the latest sanctions on Russian supply. Meanwhile, the US oil benchmark remained down by more than 3% this week as signs of robust Russian crude exports and mounting fears of a global economic slowdown continued to grip energy markets. Official data also showed that US crude inventories jumped by 4.14 million barrels last week, much more than market expectations of a 0.376 million barrel rise.

Gold steadied around $1 950 an ounce on Thursday, to retain its highest level in over nine months as investors digested monetary policy decisions from major central banks. Market participants lowered their expectations for the peak interest rates, which boosted the gold price.

Copper futures edged up to nearly $4.20/pound, moving closer to a seven-month high of $4.27/pound touched on 26 January, assisted by supply disruptions at the MMG Las Bambas copper mine in Peru. Las Bambas had been operating at reduced capacity since 7 December, after Peru’s Congress removed and arrested President Castillo. On Wednesday, MMG confirmed that it would start a care and maintenance period. The copper mine accounts for 2% of the copper production worldwide, and protests are threatening to hamper access to almost $4 billion worth of copper, at a time when China’s reopening promises to push demand.

DOLLAR HOLDS AT NINE-MONTH LOWS

he US Dollar Index steadied near 101 on Thursday, holding close to its lowest level in over nine months following the Fed’s latest rate hike. Even as the Central Bank signaled more rate hikes in the future, Powell’s remarks in relation to the start of a disinflationary period, ignited hopes that this tightening cycle may be nearing its end, which put pressure on the greenback.

The euro steadied near $1.09 on Thursday, remaining close to highs not seen since April 2022, as investors digested interest rate decisions in the US, UK, and euro area, with the ECB expected to continue with its aggressive rate hikes.

The British pound fell further to $1.231 on Thursday, after rising to as high as $1.238, as markets digested the latest BoE monetary policy decision.

The South African rand clawed back losses suffered earlier in the week, in light of a less hawkish Fed. The rand, which approached the R17.50/$ mark earlier this week, traded to a high of R16.93/$ during trade on Thursday. The rand, however, continues to face numerous risks, including ongoing loadshedding and South Africa’s potential grey listing.

The rand is trading at R17.10/$, R18.63/€ and R20.89/£