Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
Stock markets turn bearish as Fed raises rates
As expected, the US Federal Reserve (Fed) increased its base rate by 0.5% to a target range of 0.75% to 1%. This was the first 0.5% increase since 2000, and Chairman Jerome Powell signalled that the Fed is considering implementing further 0.5% increases “at the next couple of meetings”. However, the likelihood of a higher 0.75% increase was dismissed, sending momentary relief through the US stock markets.
The market gains made on Wednesday were short-lived, as investors digested the reality of a more hawkish Fed implementing higher rates and quantitative tightening in order to control inflation. Markets retraced their steps on Thursday, with the Nasdaq closing down 5% in its biggest one-day decline since June 2020.
The Fed also announced a new timetable for reversing the quantitative easing implemented to support the economy during the height of the pandemic. The next phase of quantitative tightening is due to start in June and accelerate from September onwards. This will see US Treasury and mortgage-backed securities roll off the Fed’s balance sheet at a rate of $95bn a month once the programme is at full pace.
BoE raises rates and shocks investors by predicting economic contraction
The Bank of England (BoE) followed their counterparts across the Atlantic and raised rates by 0.25% to 1%, the highest level since February 2009. Three members of the BoE’s Monetary Policy Committee voted to raise rates by 0.5%.
However, this more hawkish stance was offset by new BoE economic forecasts that point to an economic contraction caused by soaring energy prices and a cost of living squeeze. GDP is expected to fall by 1% in the fourth quarter and inflation could reach 10.2% by the end of the year, its highest level in 40 years. In response, he pound dropped 2% against the dollar.
The BoE is treading a fine line between acknowledging that further tightening may be necessary to quell inflation and preparing for the possibility of “very sharp downturn”. In contrast to its European and US counterparts, the BoE is therefore unlikely to raise rates by as much as markets expected.
Market review
US markets finished the week by suffering their longest streak of weekly losses in over a decade, as investors factored in higher inflation and interest rates impacting on economic growth. The tech-heavy Nasdaq Composite Index was once again the biggest loser in the US markets, falling by 1.5%. However, larger losses were seen in emerging markets, with the MSCI China Index falling by almost 7%.
Despite investors moving away from risky assets, bond markets also had a negative week. Longer-dated government bonds were particularly badly hit, with the Bank of America Sterling +10yr Gilts Index falling by 2.4% as yields rose.
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