Volatility Spikes as Fed Leaves Door Open For Faster Rate Hikes


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Volatility Spikes as Fed Leaves Door Open For Faster Rate Hikes

Market volatility hit its highest level since the early stages of the pandemic [1] last week as investors digested the Federal Reserve’s monetary policy meeting. Comments from Chairman Jerome Powell suggested that rates may need to be lifted more than three times this year to fight inflation whilst also signalling that the first increase will come in March. The strength of the US economy which grew sharply in Q4’21 was also cited as a reason to commence policy tightening with labour conditions also in a strong place. US equities, which had entered correction territory (-10.0% fall from recent highs) ultimately closed out the week on a positive note with the S&P500 rising by +0.8%.

Other major equity markets fared much worse with a sea of red gripping European indices. In the UK, the FTSE100 and FTSE250 fell by -0.4% and -2.8% respectively, the later impacted by a bout of weakness in the value of Sterling. The German DAX and French CAC40 also shed ground with the former retreating by -1.8% and the latter by -1.5%. In Japan, the Nikkei 225 declined by -2.9% despite Bank of Japan Governor Haruhiko Kuroda reiterating his commitment to ultra-loose monetary policy.

Sovereign yields inched higher following the Fed’s meeting with the US 10-year Treasury yield rising by 3 basis points (bps) to 1.78%. The equivalent duration domestic gilt yield jumped by 7bps to 1.24% whilst in the Eurozone, the 10-year benchmark index rose by 2bps to -0.10% as it continued to inch closer to positive territory.

Moving to commodities, oil prices maintained their upwards trajectory with Brent Crude rising by a further +2.3% to $89.97 a barrel. It had briefly moved beyond the $90.00 mark for the first time in years as tensions along the Ukrainian-Russian borders continued to rise. Gold meanwhile came under selling pressure from last week’s spike in the US Dollar with the precious metal declining by -2.6% to $1,785 an ounce. Copper slumped by -4.3% to $9,557 a tonne, impacted by a combination of Dollar strength and weak demand in China ahead of its new year celebrations. [2]


Week Ahead

The Bank of England (BoE) hosts its latest monetary policy meeting on Thursday with the MPC expected to increase interest rates for the second time in two months, this time by 25bps to its pre-pandemic level of 0.5%. In terms of domestic data, the BoE also publishes its monthly consumer borrowing statistics covering the likes of mortgage approvals and credit card lending. Friday’s Labour Market Report in the US will provide insight into the current state of employment in the country, including the jobless rate, job creation and wage growth. The Institute for Supply Management also releases its PMI equivalents which are expected to reveal a moderation in the rate of growth during January.

Moving to the Eurozone, flash Q4’21 GDP is forecast to show quarterly economic growth of 0.4%, a slowdown from the +2.2% printed for the prior quarter. CPI inflation, unemployment and final PMI’s for January are also released in what is busy week on the Continent. The European Central Bank meeting on Thursday is not expected to yield any changes on this occasion. PMI’s, both official and from media group Caixin are also due from China whilst in Japan, industrial production, unemployment, and retail sales are worth keeping an eye on. [3]

[1] T. Rowe Price 31/01/22

[2] Refinitiv, 31/01/2022

[3] Forex Factory 31/01/2022

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