Fed Hikes Rates As Inflation Conundrum Intensifies


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Fed Hikes Rates As Inflation Conundrum Intensifies

The US Federal Reserve (Fed) lifted rates by 75 basis points (bps) last week, its most significant move since 1994 as it continues to try and tame elevated inflation. During the previous week, it was revealed that headline CPI inflation surprisingly jumped to 8.6% last month [1], a 40 year high thanks largely to surging energy and food prices. The magnitude of the Fed move sparked a financial market rout as investor fears of recession intensified with the S&P500 slumping by -5.8%, its worst weekly performance since the start of the pandemic. The US housing market is one area that is already coming under pressure from rising mortgage rates with the latest housing starts data which tracks ground-breaking on new projects, slumping by more than -14.0% during May.

The Fed was not alone in tightening policy last week with both the Bank of England and Swiss National Bank hiking rates. The former lifted its base rate by 25bps to 1.25% [2], a 5th straight increase whilst the latter surprisingly moved by 50bps to -0.25% [3], its first rise for 15 years. As with the Fed both Banks cited higher inflation with further moves expected over the coming months. Both of the FTSE100 and 250 retreated sharply, falling by -4.1% and -3.8% respectively. It was a similar story across Europe with the MSCI Europe ex UK declining by -4.5%. Moving to Asia, there was mixed fortunes where the Nikkei 225 followed its Western peers lower with a weekly fall of -6.7% whilst the Shanghai Composite rose by +1.0%. Chinese equities benefited from its State Planner revealing the approval of 10 new fixed asset investments totalling more than $18.0bn [4].

With the backdrop of higher inflation and hawkish central bank policy, bond yields continued to march higher last week. Focusing on the sovereign market, the 10-year US Treasury yield rose by 8bps to 3.24% at Friday’s close having briefly reached a decade high of 3.49% on Tuesday. In the UK, the equivalent duration Gilt yield added 6bps to 2.50% whilst on the Continent, the 10-year benchmark yield jumped by 16bps to 1.66%. Meanwhile, in the commodity markets, recession fears saw oil prices plunge with Brent Crude declining by more than -7.0% to $113 a barrel. Copper also faced significant selling pressure with the metal concluding the week at $8,967 a tonne, a fall of -5.1% versus the previous Friday. As for gold, it slipped by -1.0% to $1,840 an ounce as it continued to face the major headwind of a stronger US Dollar.[5]

Week Ahead

Focus in the UK this week will be firmly on Wednesday when the latest round of inflation data is published. The headline index is expected to have risen once again last month, this time by a further 10bps to 9.1%. Retail sales numbers on Friday will also receive plenty of attention whilst flash Purchasing Manager Indices (PMIs) are published a day earlier. PMI figures are also released in the Eurozone this week in what is otherwise, a relatively quiet week for data from the region.

In the US, existing and new home sales figures will reveal the extent of the impact of last month’s surge in mortgage rates on buying activity whilst on Wednesday and Thursday, Fed Chairman Jerome Powell is testifying to both the upper and lower chambers of Congress. Meanwhile in Japan, the minutes from its most recent monetary policy meeting are released on Wednesday. There are no major macro figures published in China this week. [6]


[1] Bureau of Labor Statistics, 20/06/22

[2] Bank of England, 20/06/22

[3] The Swiss National Bank, 20/06/22

[4] T. Rowe Price, 20/06/22

[5] Refinitiv, 20/06/22

[6] Forex Factory, 20/06/22 

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