Week ahead: Oct 8th 2022
Notable economic events this week include the release of minutes from the US Federal Reserve’s September meeting, the US CPI inflation reading for September, and UK unemployment and earnings data. In company updates, look out for the latest earnings from Easyjet and US banking giants Citigroup, JPMorgan Chase and Wells Fargo.
OUR TOP TWO EVENTS FOR 10-14 OCTOBER:
Wednesday – US Federal Reserve minutes
The most recent Federal Reserve meeting saw the US central bank hike rates by 75bps, pushing the Fed funds rate up to 3%-3.25%. This pushed the US Dollar to a new 20-year high, sending the 2-year yield above 4% for the first time since 2007. Since then, both the US dollar as well as US rates have continued to make new multi-year highs.
The Fed also set out new projections for the benchmark rate, raising the average to 4.4% by the end of this year, up to 4.6% in 2023, before falling to 3.9% in 2024. Fed chair Jay Powell went on to reiterate that the FOMC were “strongly committed” to driving inflation lower, while signalling that more rate rises are on the way. Powell added that there was no painless way to drive inflation lower, with the prospect that we could see another 125bps added to the current rate by the end of this year, starting with 75bps at the November meeting.
The US central bank seems completely relaxed about the effect its monetary policy is having on the rest of the world, even as it expects US GDP to slow to 0.2% in 2022, with Powell admitting that a recession might be possible. Core inflation is forecast to decline to 4.5% this year, before falling to 2.1% by 2025.
This week’s minutes are likely to offer an insight into whether there is any unease among some Fed policymakers as to the side effects the Fed’s current policy stance more globally. There is already evidence that inflation is starting to fall back of its own accord, as lower demand prompts a tempering of prices, although core prices are proving to be slightly stickier. To date there has been little acknowledgement of the effect the surging US dollar might be having as well, particularly when it comes to the effects on US companies.
Thursday – US CPI inflation (September)
Fears over US inflation stepped up a notch in August, despite the headline consumer price index (CPI) rate slipping back to 8.3% from 8.5%. The resulting market reaction saw the US dollar continue to push higher because investors had been expecting a bigger decline to 8%, while core prices rose sharply from 5.9% to 6.3%, a bigger-than-expected increase. This rise in core prices suggests that inflation is likely to be much stickier over the next few months than markets had originally been hoping, thus adding to the risk we could see the Federal Reserve not only be much more aggressive on rate hikes but keep those rates higher for longer.
It’s certainly not a number that Fed officials are going to be happy with, and will merely serve to reinforce Powell’s message that the Fed will keep at it until there is clear evidence that inflation is on a sustainable downward path. With the US dollar continuing to look worryingly strong, and yields globally continuing to rise sharply, markets will be looking for any signs of a respite with the prospect of a softer number.
On the plus side, energy prices have continued to slip back, which is good news from a consumer point of view, however with businesses now biting the bullet and pushing prices up, any hopes of a respite look quite some way off. Core prices now appear to be the main focus here, with less emphasis on the headline CPI rate, which should continue to come down.
Overall, another volatile week ahead is on the cards, with continued escalation in geo-political tensions, economic uncertainty and inflationary pressure being key fundamental drivers of international monetary flows. Trading opportunities are fruitful, particularly in FX and technical analysis alongside solid risk management will be key to a profitable week ahead.
