Into the Home Run
Into the Home Run
Last week’s central bank meetings will undoubtedly set the tone of the markets into the end of the year and probably into the first quarter of next year. The leader of the pack, as always, was the US Federal Reserve which concluded its two-day meeting on Wednesday with the expected 50bp rate rise taking Fed Funds to their highest level for 15 years. The tone and content of Chairman Powell’s press conference after the event were as important as the rate ruse. As we said prior to the meeting, we expected Jerome Powell to come out fighting the hawk’s corner, and he did. His pronouncement that the terminal rate predicted by the Fed had been revised upwards to 5.1% helped prick the balloon of the more exuberant traders, particularly those trading the stock markets. Having said, “(We) Expect services inflation will not move down quickly, so we’ll have to raise rates higher,” he must have been, as were the markets, somewhat non-plussed by the sharp fall in Retail Sales that was reported on Thursday afternoon. Is this the first sign that the US economy is hitting a brick wall?
The European Central Bank also came out fighting with an adamant stance from Christine Lagarde, taking the market by surprise. As we noted on Friday, her words, “interest rates will still have to rise significantly …. to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our two per cent medium-term target.” hit home. The words sent shivers through the stock markets but also served to give the euro a fillip, and it ended the day on the front foot, in particular against sterling. Last but never least, the Bank of England delivered its take on the economy following Chancellor Hunt’s statement of intent on reducing inflation as his top priority. In fairness, price rises have eased slightly, with the latest CPI coming in at 10.7%. However, RPI is at 14% and food inflation nearer 16%, so there is certainly work to bring it back to the Bank of England’s target level of 2%. In common with the other central banks, the Old Lady raised rates by 50bp, which looks insufficient against the present inflation levels. Indeed amazingly, there were members of the MPC who voted for no change. With two hawks, the Fed and the ECB, circling, it’s no wonder that sterling suffered and as we approach the quiet trading period of the next two weeks looks likely to suffer more.
The week ahead, indeed the next two weeks, will almost certainly be sepulchral as we embrace the Christmas and New Year Holidays. The main drivers will continue to be last week’s actions by the central banks which we fear could see sterling continue to fall against both the single currency and the greenback. Of course, there are some items on the data docket to keep the workaholics in the US happy. On Thursday, the US weekly jobs data will be published, and then November’s Personal Consumption, Income and PCE Price Index will be posted on Friday afternoon when most of us will be past caring. And, of course, as we approach year-end, there may be some rebalancing flows, ordinarily detrimental to the dollar, but in reality, come midday on Friday, London will have mostly closed its books on what was a momentous year.