Central Banks Raise rates Again as Fed Drives Global Inflation Fight | Daily Market Analysis

Key events:

• Germany - German Manufacturing PMI (Sep)
• UK - Composite PMI                                 
• UK - Manufacturing PMI               
• UK - Services PMI
• Canada - Core Retail Sales (MoM) (Jul)
• USA - CFTC GBP speculative net positions

Global central banks continued raising interest rates on Thursday, following the U.S. Federal Reserve in a fight against inflation that is sending shockwaves through financial markets and the economy.

On Wednesday, the U.S. Central Bank raised the interest rate on federal funds rate by 75 basis points, now its range is 3-3.25% per annum. The decision, taken unanimously by all 12 voting FOMC members, coincided with the forecasts of most economists and analysts.

Now it is at the maximum level since the financial crisis of 2008. Meanwhile, the FOMC believes that further raises will be justified: according to the median forecast of the FRS members, the rate will amount to 4,4% by the end of 2022 and 4,6% by the end of 2023. Leading U.S. indices reacted with a 1.7-1.8% decline.

DJI, SPX, and NASDAQ chart

The Nasdaq Composite fell 1.8%, the S&P 500 fell 1.7% and the Dow Jones Industrial Average fell 1.7%.

Apparently, at least two more rate hikes are possible this year (in November and December). And quite possibly by at least 100 basis points in total.

In other words, we could well see 4.4-4.5% by the end of the year. And by the end of 2023, perhaps even higher - 4.6.

Restrictive monetary policy may continue for quite a long time - as long as necessary to achieve the inflation target.

Thus, high rates will be held above neutral levels until the visible results of tightening become apparent. Quite possibly considerably more than a year.

The problem is that monetary tightening is bringing the U.S. economy closer to recession. Speaking of forecasts, expectations for 2022 are sharply lowered.

▪️ Instead of 1.7% to 0.2%. U.S. GDP growth in 2023 is also revised. The forecast is 1.2%, instead of the previously expected 1.7%. In fact, a recession.

▪️ The unemployment rate has also been revised downward from 3.9% to 4.4%.

▪️ The average interest rate is expected to be 4.6% next year.

▪️ The QT - doubling the sales limit on debt securities to $60 billion for Treasuries and $35 billion for mortgages - could also add oil to the fire. Previously, the Fed sold $30 billion worth of Treasuries and $17.5 billion worth of mortgages every month.

Finally, we heard the Fed chief say very harshly that restoring price stability while achieving a "soft landing" may not be easy. Basically, we can expect more turbulence in the markets in the future. Hasn't that been clear for a while now?

By the way, Ray Dalio predicts that a rate hike to 4.5% will cause U.S. stock prices to fall nearly 20%. Well, without Ray Dalio, analysts were expecting the S&P index to stroll to 3,200-3,600 by December, back in July. Well, so far, everything is going according to that prediction.

Switzerland interst rate curve

Moreover, the central bank of Switzerland on Thursday announced about rate increase also on 75 b.p., up to 0,5% per annum. The regulator has resorted to raising the rate for the second time in a row to combat high inflation: in June, the rate was raised by 50 bps, to minus 0.25% per annum. Prior to that, Switzerland's interest rate had been at minus 0.75% since 2015.

UK interest rate curve

The British Central Bank increased the rate by 50 basis points to 2.25%, but three of the nine members of the Monetary Policy Committee voted for a sharper increase, by 75 bp. The rate was raised for the seventh meeting in a row, and for the second meeting in a row, the increase was 50 bp.

Trading in Asia finished lower amid tightening of MP in the USA. The Shanghai Stock Exchange index lost 0.3%, the Hang Seng of Hong Kong - 1.7%, South Korea's KOSPI - 0.6%, and Japan's Nikkei - 0.6%.

While banks in the West are tightening monetary policy, the Bank of Japan left its ultra-soft monetary policy unchanged today. The bank said in a statement that it will leave its current policy unchanged, "aiming for the 2% price stability target as long as necessary," and that it "will continue to expand the monetary base until the observed annualized CPI growth rate exceeds 2% and stays above the target level on a stable basis. Japan's inflation rate in August was 2.8%, the highest level since 2014, but the country's central bank has repeatedly said it views this increase as temporary.