Weekly economic and financial commentary

Wells Fargo Research Team Wells Fargo

Summary

United States: Going to take more to break this consumer

Incoming data indicate a slowing yet resilient economy. Recent strength makes it less likely in our view that a recession will start by the beginning of next year and also means more monetary tightening will be necessary to slow growth sufficiently to quell elevated inflation. We still forecast a modest recession next year, but now are expecting it to begin a bit later.
Next week: ISM Manufacturing Index (Mon), ISM Services Index (Wed), Employment (Fri).

International: Bank of England intervenes to calm markets; Eurozone inflation hits double digits

After the U.K.'s mini budget fueled concerns about inflation, the BoE committed to temporarily buying unlimited long-dated gilts to soothe markets, and will make a full assessment at its next policy meeting on November 3, where we expect a 100 bps rate hike. In other news, Eurozone September CPI reached 10% year-over-year. With the natural gas supply relationship between Russia and Europe deteriorating, there are concerns that energy prices will climb even higher.
Next week: Japan Tankan Survey (Mon), RBA Decision (Tue), RBNZ Decision (Wed).

Interest rate watch: Update to our Fed funds forecast

The continued resiliency of the U.S. economy and the FOMC's apparent willingness to do "whatever it takes" to rein in inflation has led us to upwardly revise our forecast. We now see the Committee taking its target range for the fed funds rate to 4.75%-5.00% by Q1-2023.

Credit market insights: Five trillion down, still 26 trillion up

The Fed's updated Distributional Financial Accounts indicated declining household wealth over Q2 of this year. Since its peak in the Q4-2021, household wealth is down over $5 trillion, from $141.9T to $135.8T, and all but a quarter trillion of this decline occurred in Q2. Even with the recent hit to wealth, household wealth is still almost 24% above pre-pandemic levels.

Topic of the week: Easy on the gas: Germany institutes energy price cap

On Thursday, the German government announced plans to institute a $194B package aimed at curtailing crippling energy costs. This announcement came on the same day that Germany’s September CPI report revealed inflation surging to a scorching hot 10.9% year-over-year.

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Wells Fargo Research Team

Wells Fargo

AUD/USD picks up bids above 0.7100 after RBA-speak

AUD/USD picks up bids above 0.7100 in the Asian session on Tuesday, following hawkish comments from RBA Assistant Governor Sarah Hunter and Governor Michele Bullock. However, escalating tensions in the Middle East and the Fed's hawkish outlook remain supportive of the bullish US Dollar undertone, which could limit the pair. The crucial Trump-Xi summit is later this week and remains in focus.

USD/JPY holds small gains near 157.50 as JPY intervention risks loom

USD/JPY posts modest gains while trading near 157.50 in the Asian session on Tuesday as intervention fears help limit losses for the Japanese Yen. However, the BoJ's dovish rate hike to a 31-year high keeps JPY bulls on the back foot. Meanwhile, the US Dollar retains a bullish undertone amid the Fed's hawkish outlook and escalating Middle East tensions, providing tailwinds for the pair.

Gold recedes a tad; still above $4,300

Gold extends its decline for a second straight session, slipping below the $4,300 mark per troy ounce, just to regain some composure afterwards. The precious metal remains under pressure as expectations that the Fed will keep interest rates higher for longer continue to support US Treasury yields and the US Dollar.

Bitcoin pauses rally as profit-taking reaches yearly high

Bitcoin takes a breather, facing a pullback, trading below $85,500 on Tuesday after surging 6.7% the previous day. Strong institutional demand supports the bullish price action, with spot Bitcoin Exchange Traded Funds recording nearly $1 billion in inflows on Monday and Strategy adding 950 BTC to its treasury.

Energy and risk markets remain in the driver’s seat

US stock markets rallied up 2.26% (Nasdaq) yesterday with AI/tech names leading the advance. The Nasdaq even tested the all-time high reached early June. The likes of the S&P 500 and EuroStoxx50 recovered up to 1.5%. Positive risk vibes and lower energy prices supported consolidation on bond markets following the past month’s heavy losses. European yield curves bull steepened.

BoJ Recap: Not as hawkish as expected

The Bank of Japan (BoJ) raised its short-term interest-rate target to 1.25% from 1.00% in a 7-2 vote, marking another step in the normalisation of monetary policy and widely matching what everyone has been expecting for weeks.