Well, folks, buckle up because it’s been quite a week in the wild world of finance! It was like a circus, with central banks strutting their stuff, trying to balance signals of weakening growth and sticky inflation.
Let’s break it down in a way that even your grandma would understand.
Notable News & Economic Updates:
🟢 Broad Market Risk-on Arguments
The Swiss National Bank held their main policy rate at 1.75% on Thursday, slightly unexpected, and kept the door open for more action if needed
The Bank of England held their main policy rate at 5.25% on Thursday, largely expected after a lower-than-expected U.K. CPI read earlier, with a vote of 5-4 for holding.
U.S. Flash Manufacturing PMI for September: 48.9 vs. 47.9; greater hiring activity but sales & demand environment remains muted
U.K. Flash Manufacturing PMI for September: 44.2 vs. 43.0 previous
The Bank of Japan kept ultra-low interest rates unchanged at -0.10% as expected; Gov. Ueda said that they’re “monitoring currency moves carefully” for their impact on inflation
🔴 Broad Market Risk-off Arguments
Canada CPI for August: 4.0% y/y (3.9% y/y forecast; 3.3% y/y previous); Core CPI at 3.3% y/y (3.5% y/y forecast; 3.2% y/y previous)
Eurozone’s final headline CPI was adjusted from 5.3% to 5.2% y/y; core CPI steady at 5.3% y/y
On Wednesday, the Fed kept its Fed funds target range at 5.25% – 5.50% as expected; The Fed’s dot plot forecasts pointed to at least one more rate hike in 2023 and “only” a 50bps rate cut in 2024 (from a 100bps rate cut estimated in June)
Other Central Bank Action:
- Sweden’s central bank lifted their main policy rate by 25 bps to 4.00%, signaled potentially more hikes ahead as inflation pressure is still too high
- Norway’s central bank hiked their key interest rate by 25 bps to 4.25%
- Turkey’s central bank raised their main policy rate from 25% to 30%, the fourth hike in a row.
Russia temporarily banned fuel exports to stabilize domestic fuel market on Thursday. No expectations were set on when the ban will be lifted.
HCOB Flash Eurozone PMI for September: 43.4 vs. 43.5 in August; falling confidence in year-ahead outlook as new orders fall; input prices rose at a much faster pace than output prices
Japan Chief Cabinet Secretary Matsuno: The government is monitoring currency developments “with a high sense of urgency,” and warned that it’s not “ruling out any options”
Japan Flash Manufacturing PMI for September: 48.6 vs. 48.9 previous; Services PMI was 53.3 vs. 54.3
Global Market Weekly Recap
Dollar, Gold, S&P 500, Oil, U.S. 10-yr Yield, Bitcoin Overlay Chart by TradingView
The week kicked off with all the enthusiasm of a Monday morning commute. Low volatility ruled the days on Monday and Tuesday as traders twiddled their thumbs, eagerly anticipating the financial extravaganza that was about to hit them like a ton of bricks starting on Wednesday.
Then on Wednesday came the most anticipated event of the week: the FOMC monetary policy statement! The Federal Reserve, in all its wisdom, decided to keep its Fed funds target range steady at 5.25% – 5.50%, just as everyone expected. But here’s the twist—their dot plot forecasts hinted at more rate hikes in 2023 and a “measly” 50bps rate cut in 2024.
Obviously the market went bananas as traders who were hoping for signals significant rate cuts next year (or at least less hawkish rhetoric) due to weakening growth signals had to reprice expectations! The U.S. dollar and bond yields shot up like they were on a rocket ship, while gold, crypto, and stocks took a nosedive.
On Thursday, the central bank action picked up bigly with five central bank statements. The Bank of England’s monetary policy statement was the most notable, and they did what was expected after a disappointing U.K. CPI inflation update—kept rates steady. But oh boy, the drama! It was a nail-biting 5-4 vote to hold, as if they were deciding who gets the last biscuit at a British afternoon tea. Brexit mayhem, inflation updates—it’s all in a day’s work for the BoE.
Across the Swiss Alps, the Swiss National Bank (SNB) pulled a move that some didn’t see coming. They decided to keep their main policy interest rate on lockdown at 1.75%, rather than an expected hike 2.00%. Given their recent economic growth hiccups and soft inflation reports (as discussed in our Event Guide), we guess they wanted to maintain their Swiss neutrality in the financial ring. Even so, this sparked a big strong negative reaction in the Swiss franc on the session.
Meanwhile, in other parts of the globe, some central banks decided to channel their inner hawks. Sweden, Norway, and Turkey’s central banks all hiked their key policy interest rates as inflation rates remain elevated. It’s like they were saying, “Inflation, you better watch out—we’ve got our feathers ruffled!”
But overall, broad market prices continued on their Fed reaction paths with risk assets falling further and the U.S. dollar and bond yields remaining elevated through the rest of the session. The one exception was oil prices, bouncing from earlier weakness after news hit the wires that Russia decided to ban fuel exports temporarily to fix their domestic fuel market. No one knows when they’ll lift the ban, but for now, it’s looks like the pullback is over and oil prices may resume their trajectory higher.
Then came Friday, and the market got a taste of fresh Flash PMI data from around the world. Europe and Asia were flashing continued warning signs of contraction, while the U.S. was doing the financial version of the moonwalk—services were partying while manufacturing was trying to keep up, albeit with a bit of a limp.
The reaction to the PMI updates was relatively muted, arguably as expected given the lofty volatility seen the previous two sessions, and possibly on the PMI data coming in mostly as expected.
Overall, it was another solid week for the U.S. dollar and bond yields, but the biggest currency winner of the week was the New Zealand dollar, which likely continues to thrive off of bullish sentiment in reaction to recent stimulative efforts from China, as well as counter currency weakness.
The British pound was the big currency loser this week among the majors, sentiment that started earlier in September after the Bank of England set new expectations for monetary policy that it was likely restrictive enough and that further hikes were likely no longer needed.
