Market Overview
Equity markets ended in the red last week as FOMC hiked interest rates by 75-bps at the end of their two-day meeting. The increase has moved the Fed’s target rate to 3%-3.25%. This brings the projections for a 4.25%- 4.50% rate by the end of the year. The Fed maintained its hawkish stance from the Jackson Hole symposium, stressing on the need to focus on inflation. Fed Chair Powell reiterated: the longer inflation continued, the more entrenched the higher expectations of inflation become and he was strongly committed to containing inflation. As expected, the equity markets reacted in red.
Chancellor Kwasi Kwarteng combined £45 billion of tax cuts with a massive wave of net borrowing. The pound fell to almost parity with the US dollar following the fiscal announcement on Friday as investors sought safe-haven and led to the strengthening of the US Dollar with the GBPUSD pair reaching 1.035 low on Monday. While expectations for an emergency rate hike was unfounded, the BoE has said that it would “not hesitate to change interest rates as necessary to return inflation to the 2 per cent target sustainably in the medium term”. Markets have priced in a 1.5 percentage point increase in the next meeting bringing the rate to 3.75% in November. The bank rate is expected to reach almost 6 percent in May.
Meanwhile, the Brothers of Italy leader Giorgia Meloni won the general election making her Italy’s first female prime minister and signaling a far-right government taking hold of Italy. Volatility in the markets are expected to remain elevated. In terms of the economic calendar, the Personal Consumption Expenditure (PCE) Price Index will be released on Friday. Core PCE is the US Fed’s preferred measure of inflation and helps guide its monetary policy decisions, Volkswagen is also expected to raise €9.4 billion with the sale of its 12.5% share in non-voting shares of Porsche, representing one of Europe’s largest IPO this Wednesday.
Commodities, FX and Bonds
The pound hit an all time low against the dollar almost achieving parity as the BoE and treasury rushed to calm the market as investors worries about the sustainability of public finances. An emergency interest rate rise was feared but did not occur with the BoE issuing a statement that it “would not hesitate to change interest rates” to keep inflation under control. UK gilt reached nearly 4.2% up from 3.5% prior to Friday’s fiscal announcement. Crude Oil fell to around USD 78 following expectations for slower economic growth in the future.
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