Rate hikes and rising inflation dominated the news across the globe this week. Read on to find out what happened at the Jackson Hole Economic Symposium...
Markets spooked by central bankers' warning of "more pain" to come
In a highly-anticipated speech at the Jackson Hole Economic Symposium, US Federal Reserve (Fed) Chairman Jerome Powell reiterated that his priority is to bring inflation back to near its 2% target level. The hawkish tone echoed previous comments that monetary tightening may need to be in place for longer in spite of ‘some softening’ in the labour market and potential ‘pain’ for households and businesses.
There had been some hope that July’s lower-than-expected inflation figures would dampen the possibility of a 0.75% rate rise at the Fed’s the next meeting, in September. However, Powell has said this decision will be data-driven, which will place intense scrutiny on the August CPI data and September US labour market report. Powell also reminded his audience that the experience of the 1960s and 1970s suggests that cutting rates too prematurely can lead to inflation resurging and greater pain in the long-run.
In a similar vein, European Central Bank (ECB) board member Isabel Schnabel warned that sacrifices will be needed in order to tame price rises in Europe. Echoing the sentiment, Francois Villeroy de Galhau, Governor of the Banque de France and fellow ECB member, said that there should be no doubting the bank’s determination to bring inflation down to its 2% target. As in the US, there is speculation that the ECB may raise rates by 0.75% in September. However, ECB Chief Economist Philip Lane argued for a ‘multi-step calibrated series rather than a smaller number of larger rate increases.’
Chinese central bank continues to cut rates
While many of the world’s central banks are raising rates, the People’s Bank of China has lowered the interest rate used to price mortgages by 0.15% in a bid to boost China’s faltering housing market. Having cut short- and medium-term lending facility rates to boost slowing economic growth and support credit growth earlier this month, policymakers have moved to protect the property sector, which makes up almost 30% of the nation’s GDP.
China’s property market has seen a dramatic slowdown, with sales down 30% year-on-year in the first seven months of 2022 alone. China’s Evergrande, the world’s largest property developer, received much attention when it defaulted in 2021, but the issue of malaise in Chinese property is widespread. At the time of writing, 19 of China’s top 50 developers recently defaulted on their bonds. The highly leveraged sector has suffered from falling house prices and the dynamic zero-COVID policy has further dampened sales. Apartment owners at around 300 different developments are now refusing to make mortgage repayments on unfinished properties.
South African inflation continues to climb as fuel prices soar
Inflation in South Africa hit a 13-year high of 7.8% year-on-year in July, up from 7.4% the previous month. Much of the pressure is coming from energy, with fuel prices up 9.4% over the month, taking the annual increase to 56%. The rising cost of energy, combined with shortages of fertiliser and wheat caused by the war in Ukraine, have pushed up food prices by 10.1% over one year. In addition, there are signs that inflation is broadening out, with core CPI up 4.6% year-on-year.
The South African Reserve Bank raised its main rate to 5.5% in July, an increase of 0.75% and the highest rate for almost 20 years, but further measures may be needed to combat cost-of-living pressures that have provoked protests by thousands of workers.
It was a negative week across all major developed markets with the MSCI ACWI, the main global equity index, falling just shy of 3%. In the US, the NASDAQ fell by over 4% following Jerome Powell’s comments at Jackson Hole, and hawkish comments from the ECB triggered a 3% fall in the Eurostoxx index. Bucking the trend, Chinese equities responded positively to news of further government stimulus, with a 3% rise in the MSCI China index.
The only sector to end the week in positive territory was global energy; the MSCI ACWI Energy index rose by almost 4% and the benchmark for oil, Brent Crude, rose 4.4% over the week.
Bonds also saw prices fall as yields rose. Anticipation of higher interest rates for longer meant that longer-dated bonds fared the worst. The indices for both long-dated gilts and UK corporates, the BAML 10+ Yr Gilts and BAML 10+ Yr non-Gilts, each fell by almost 3%.
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