What a week – And it’s not over yet

A busy week for central banks come to an end with plenty of rate hikes, increased prospects of slowing growth, that leave investors with a bad taste in their mouth. But the week is not over. The Italian elections due Sunday will likely continue pressuring the euro lower.  

What a busy week

We had a tsunami of central bank decisions, and many surprises this week.  

The Swedish Riksbank was the first major central bank to surprise with a 100bp rate hike. 

The US Federal Reserve (Fed) delivered its third 75bp hike. But the dot plot hinted at another jumbo hike before the year-end. We are ending the week with nearly 75% chance of a fourth 75bp hike in November.  

The Bank of Japan (BoJ) maintained its policy rate unchanged at -0.10%, but intervened directly in the FX market to buy yen to fight back the strengthening dollar as the USDJPY hit the 145 mark. It was the first currency intervention from the BoJ since 1998 – to tell you how frustrated the policymakers got with the dollar rally. The pair pulled to 140 level, then rebounded past 142. But we are not sure about how long the BoJ could counter the yen weakness, and by how much it could ease the pressure on the yen, knowing that Japan is increasingly isolated in conducting an ultra-dovish monetary policy. In fact, Japan is now the only country still offering negative yields on its bonds, while there were 21 of them back in May 2020. So, you bet, the pressure on the yen will remain tight. But, the BoJ intervention will likely cool down the JPY-bears, as the threat of a sudden and a sharp appreciation in the yen will help taming speculation against the Japanese currency.  

The Swiss National Bank (SNB) raised its policy rate by 75bp yesterday, but the Swiss franc took a severe hit, as apparently, traders were expecting a second month surprise – which didn’t happen. The dollar-swissy rebounded to 0.9850, while the euro-swissy hit the 50-DMA, before bouncing back. Despite the negative kneejerk reaction, the hawkish shift in the SNB policy stance should continue having a positive impact on the Swiss franc. On the equities front, the strong franc will likely further squeeze the Swiss exporters, and pressure the Swiss equities to the downside. The SMI lost 1.26% yesterday, and slipped below the summer lows. We are now at levels last seen in December 2020, and it’s just a matter of time we see the index slip below the 10’000 psychological mark.  

The Bank of England (BoE) opted for a 50bp hike, combined with an £80 billion Quantitative Tightening, and said the UK is now in recession. Officials said that the huge energy package to contain energy costs would ‘likely limit significantly’ the positive pressure on inflation. They pulled their peak inflation expectation from 13 to 11% for this autumn. But they also said “while the guarantee on energy bills reduces inflation in the near term, it also means that household spending is likely to be less weak … this would add to inflationary pressures in the medium term.” The pound continues its race to the bottom. Cable tested the 1.12 support post-BoE, and the 1.12 support could well be pulled out with the announcement of – what they call – a mini budget today. But the mini budget has nothing mini, really. The UK government will reveal a £200 billion spending package, including the massive plan to limit the energy bills, and also the biggest tax-cuts in 34 years. The government will announce how it will finance this huge spending. The policymakers hope that the tax cuts will boost the British economy, increase its revenues and prevent a massive increase in the national debt. Though it sounds crazy, in theory, it is possible. According to the Laffer curve, there is an ideal tax rate above which individuals don’t want to work more, to pay less taxes. So, if the UK is above the ideal tax rate, bringing it lower could actually help refill the government’s coffers. But I am not sure, investors will take the massive spending package this relaxed. We will rather see the British yields further spike. The 10-year gilt yield is now at 3.50%, compared to near 0 at the beginning of the year. 

Norges Bank also increased its policy rate by 50bp but signaled that tightening may be coming to an end. Indonesia and the Philippines also hiked by 50bp. Taiwan raised by a modest 12.5% as expected, Vietnam opted for a 100bp hike, South Africa raised by 75bp.

and Turkey… cut its rate by 100bp for the second consecutive month! The USDTRY spiked to 18.40 but the move was contained with the central bank selling more dollars. Anyway, the BIST index jumped 1.50% yesterday while the mood elsewhere was rather morose.  

We saw the S&P 500 slip to 3750, while Nasdaq fell more than 1% to 11500 level. The barrel of American crude rallied to $86 but the top sellers rapidly came in to pull the price back to around $83 on looming recession worries. FedEX, which shook the markets last Friday with its warning of a slowing demand said that it will increase rates by nearly 7% starting from January for its express, ground and home delivery services, and that they will reduce flight frequencies and suspend certain Sunday operations.  

Into the Italian elections

The EURUSD tested 0.98 support yesterday and remains under pressure ahead of the Italian election due Sunday. The polls give more chance for a right-wing win, as the right wing could join forces, with Berlusconi back on headlines, while the left’s inability to cooperate gives them no chance of winning this Sunday, the experts say. As a result, the far-right Fratelli d’Italia party is expected to win a majority of the vote on Sunday and the vote will be a major political shift for Italy – a pivotal country for the EU -, and not toward the ‘right’ direction.