Central Banks Hike Rates As Recession Fears Gather Momentum

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09/05/2022
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Central Banks Hike Rates As Recession Fears Gather Momentum

The US Federal Reserve (Fed) and Bank of England (BoE) both pushed through interest rate rises last week as the Central Banks ramped up their efforts to tame surging inflation. The Fed’s 50 basis point (bp) hike to a range of 0.75-1.00% was the largest single move since 2000 [1] whilst the BoE raised its base rate to 1.0%, its highest level since 2009 [2]. That was despite the BoE slashing its 2022 economic growth forecast whilst also citing the increased possibility of a recession.

With hawkish central banks and a weakening economic outlook as a backdrop, volatility was a persistent feature for global equity markets last week. Having initially gained in the immediate aftermath of the Fed meeting, US equities quickly retreated during Thursday and Friday’s trading. The S&P500 ultimately concluded the week -0.2% lower, a fifth consecutive week of losses. Moving to Europe, the MSCI Europe ex UK slumped by -4.6% whilst across the Channel, the FTSE100 declined by -2.1% with the ongoing war in Ukraine and strict lockdown’s in China also weighing on sentiment. Meanwhile in Japan, the Nikkei 225 bucked the negative trend to record a +0.6% weekly rise.

Unsurprisingly sovereign yields continued to push higher, reflecting the moves made by the Central Banks. The 10-year US Treasury yield surged beyond the 3.00% threshold, a 24bp increase leaving it at 3.13% whilst in the UK, the equivalent duration gilt yield rose by 9bps to 2.00%. As for Europe, the 10-year benchmark index matched the increase seen in the US as it concluded the week at 1.14%.

Moving to commodity markets, oil prices moved higher as traders assessed a possible EU ban on imports from Russia; Brent crude rose by +4.4% to $113 a barrel as traders shook off concerns over the economic outlook. Elsewhere, gold declined by -1.2% to $1,886 an ounce reflective of the increased strength of the US Dollar whilst copper slumped by -3.7% to $9,411 on demand concerns relating to a possible global slowdown. [3]

 

Week Ahead

Inflation is the standout data from the US this week with expectations for a further rise in headline CPI expected, albeit at a slower pace. Inflation data is also due from China this week with economists predicting a 40bps increase in the headline rate to 1.9%. Meanwhile in the UK, preliminary GDP data is forecast to show modest growth during the first three months of the year. Other domestic data to keep an eye include retail sales from the British Retail Consortium alongside industrial and manufacturing production figures from the ONS. Eurozone data is in short supply on this occasion with the monthly economic sentiment indicator from research institute ZEW the only figure of note. As for Japan, there are no major macro figures published this week. [4]

 

 

[1] T.Rowe price, 09/05/2022

[2] Bank of England, 09/05/2022

[3] Refinitiv, 09/05/2022

[4] Forex Factory, 09/05/2022

 

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