The U.S. Federal Reserve (Fed) raised interest rates by a further 75 basis points to the 3.75%-4% range on Wednesday, its fourth consecutive hike this year. During the press conference, Fed Chair Jerome Powell suggested no plans of a pause in hikes any time soon but rather that the size of future hikes would likely be in smaller increments. The Fed’s next meeting is scheduled on the 14th December 2022.
U.S. and European financial markets recorded a second week of strong gains, despite mixed economic and company earnings signals. Growing hopes that the Federal Reserve might slow its pace of rate hikes drove markets higher, after the Bank of Canada unexpectedly hiked rates by only 0.50% instead of the expected 0.75% increase, fuelling hopes that the Fed might follow its example next week.
British Prime Minister Liz Truss resigned on Thursday after just 45 tumultuous days in office, making her the shortest-serving prime minister in British history. Her government collapsed in the wake of the market turmoil sparked by her proposals to cut taxes for the country’s top earners and boost borrowing and spending. The frontrunners to replace Truss as prime minister are former chancellor of the Exchequer (finance minister) Rishi Sunak and former prime minister Boris Johnson.
Third quarter earnings reporting season began in earnest this week with major U.S. banks reporting strong numbers. JPMorgan Chase, Wells Fargo and Citigroup beat Wall Street expectations while Morgan Stanley reported earnings and revenue that missed analysts’ forecasts, sending the stock lower. Strong earnings sent the banks’ share prices higher amid a largely declining market, proving how significant the third-quarter earnings season is for investors.
Markets got off to a strong start in October, with the S&P 500 Index (+5.6%) recording its biggest two-day rise since April 2020, before giving back some of those gains later in the week. The U.S. jobs report released on Friday, suggests that the U.S. economy may not be slowing enough to satisfy Federal Reserve policymakers. Downside economic releases earlier in the week, originally raised hopes that the Fed might slow its rate hiking cycle.
Concerns about the outlook for the global economy continued to weigh on financial markets amid growing fears of aggressive central bank policy and heightened geopolitical tensions sent stocks in the U.S. to their third consecutive weekly decline. The benchmark S&P 500 index ended the week 2.91% lower, while the tech heavy Nasdaq was 2.69% lower on the week.
Policy rates rose further across the G10 (ex-Japan) as central banks ramped up efforts to quash resilient inflation. Rate hikes of 100bp in Sweden, 75bp in the U.S. and Switzerland and 50bp in the U.K and Norway were implemented this week, amplifying recession fears. The Bank of Japan left its ultraloose policy unchanged on Thursday, setting off a rise in the dollar to its highest level versus the yen since 1998.
Inflation remains at the centre stage of financial markets this year. U.S. inflation release this week, triggered the biggest daily decline in the S&P 500 in over two years and drove interest rate expectations higher. The road to the Fed’s 2 percent inflation target appears increasingly long and could include some economic pain along the way.