Dim outlook as global markets drop after Fed warns of more rate hikes to come

macro overview

Equity markets in Europe opened today’s session lower, matching the performance of US and APAC indices, after the US Federal Reserve (Fed) raised its interest rates by another 75-basis points (bps).

The dollar basket has set a new two-decade high, now trading above 111. As expected, the Fed raised its target for Fed funds rates to 3%-3.25%, a decision unanimously taken by Fed board members, as the latest inflation data showed no improvement despite his efforts.

Federal Reserve

The Federal Open Market Committee (FOMC) statement reiterated “the committee is strongly committed to returning inflation to its 2% objective.” Fed chair Jerome Powell said “we have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.”

The Fed funds rate projection indicates a further 125 basis point increase by the end of the year.

During the press conference that followed the announcement, Powell singled out the housing market as a persistent source of rising consumer inflation: “What we need is supply and demand to get better aligned… We probably in the housing market have to go through a correction to get back to that place.”

Alongside the rate decision, the Fed published its latest economic projections and expects the economy to slow. New projections see the economy growing by 0.2% in 2022, rising to 1.2% in 2023. Unemployment, currently at 3.7%, is anticipated to rise to 3.8% this year and to 4.4% in 2023.

As for inflation, new projections put it on a slow path back to 2% in 2025.

Bank of Japan

As widely expected, the Bank of Japan (BoJ) kept its ultra-accommodative policy in place. The short-term interest rate remains at -0.1%, and 10-year bond yields target around 0% by a unanimous vote.

BoJ governor, Haruhiko Kuroda, has ruled out a near-term withdrawal of stimulus, arguing that wages need to rise more to sustainably achieve his 2% inflation target.

Kuroda’s dovish message further weakened the yen. USD/JPY briefly climbed above ¥145 for the first time since August 1998.

Bank of England

Having delayed its meeting from last week after the passing of Queen Elizabeth II, the Bank of England (BoE) decides today on its interest rates. Economists expect another 50-basis point hike, which would take the main rate to 2.25%.

As opposed to the Fed and the European Central Bank (ECB), the BOE hasn’t yet opted for a larger, one might say more courageous rate increase of 75-basis points, which is one of the reasons why GBP/USD has failed some 15% in the past eight months.

It’s worth recalling that second quarter (Q2) gross domestic product (GDP) contracted for the first time in more than a year, and last Friday’s retail sales showed a much larger than forecast drop for the month of August. Therefore, any rise in sterling on the back of a hawkish BoE move could be short-lived as the risk of recession is mounting.

Equities

Elsewhere on the equity market, JD Sports Fashion PLC posted first half (H1) results at the top end of the board’s expectations. Profit before tax and exceptional items reached £383.5 million, lower than £439.5m posted a year ago.

In the US, FedEx Corp is expected to confirm weak earnings and revenue, after its warning last week. FedEx shares tanked in extended trading after the company drew its full-year financial forecast.

FedEx says it expects to post earnings of $3.44 per share, well below analysts’ consensus of $5.17. Revenue should also fall short of expectations, at $23.20 billion. FedEx CEO, Raj Subramaniam, said in a statement that “global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the US We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations.”

Also expected today are quarterly reports from Accenture PLC and Costco Wholesale Corp.

commodities

On the commodity market, oil prices fell after the Federal Reserve announcement. Yesterday the EIA confirmed API estimates of a stock increase across the board. Crude inventories rose by 1.1 million barrels last week, gasoline stocks rose by 2.6 million barrels, while distillates also rose by 1.2 million barrels.

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