Equity markets gained from a two-day rally on Monday/Tuesday as a result of the developing sentiment in the market questioning the Fed’s ability to raise rates with a developing recession at home, the impacts on the financial markets and potential defaults as well as struggles with allies in Europe and Japan on the values of the currencies. On Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) by the Bureau of Labor and Statistics showed a fall in job openings in August by 1.1 million- the jobs opening rate had declined on a monthly basis to 6.2%. The rally was short lived however and by Friday the gains were wiped out as the unemployment rate fell to 3.5%, a historic low, showing the labor market was still tight and keeping the Fed on track for its aggressive hike path. Central banks continue to struggle with balancing their twin mandates to reduce inflation while mitigating the risk of a recession. While the labor market remains tight for now, food or energy supply shocks cannot be ruled out. We can still expect another 150 bps of Fed Fund rate hikes that will bring the terminal rate to 4.75% by year end. A stronger US dollar may force other central banks to remain hawkish.
Citi expects global real GDP growth of 2.9% in 2022 slowing to 2.1% in 2023. Global inflation is expected to be 7.1% in 2022 and remain elevated in 2023. The investment bank expects Europe and the UK to enter recession this year and the US to follow in 2023. China’s expected rebound next year should provide some relief to the slowdown elsewhere.
Volatility remained elevated in the bond market as well with the 2-year Treasury closing the week at 4.31%, up from its low of 4.10% on Monday. Equity markets were also affected by fund managers rebalancing their large equity holdings at the end of the quarter (September 30)
Commodities, FX and Bonds
The US dollar strength continued last week with the dollar gaining against the EUR, GBP, CHF, JPY and CNY. The release of the non-farm payroll report which showed that 263K jobs were added vs. expectation of 250k jobs, while employment rate fell to 3.5% gave the indication that the labor market was still strong enough and the US Fed would not be dissuaded from its current aggressive rate hike path. Accordingly, the bond yield have soared with the US 2-year gaining 20 bps to reach 4.31% by end of the week. Bond yields in other countries also rose as a US dollar would ensure the central banks would follow suit. WTI Crude Oil rose to 92.08 on OPEC+’s decision to remove 2 million bpd in anticipation of reduced demand due to recession. The large reduction by the OPEC+ would likely draw a response from the US and the International Energy Association to release additional strategic oil reserves.
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