Investors weigh up the prospect of further interest rate rises
Both equities and bonds declined over the week as investors assessed the potential for further monetary policy tightening from the US Federal Reserve (Fed). Jay Powell, Fed Reserve Chair, warned of further rate rises in a Q&A at the Economic Club of Washington; his remarks were in fact interpreted as less hawkish than investors anticipated. However, it was comments from other Fed officials throughout the week that weighed on markets. Raphael Bostic, president of the Fed’s Atlanta branch, remarked that January’s strong jobs report could lead to a higher peak in interest rates, whilst Minneapolis Fed president Neel Kashkari said that ballooning jobs growth was proof that the Fed needed to “raise rates aggressively”.
These comments contributed to the US equity market finishing lower by -1.33% as of 11am London time, with the technology index dropping -1.81% over the week. In Europe, market falls were less pronounced with the UK index down -0.69% and the European index falling -0.81%. Losses in Europe were limited after new German inflation figures reassured investors that the European Central Bank may not have to raise rates more than expected to combat rising inflation. German inflation slowed to 9.2% in January year on year, below economists’ expectations.
Japan was one of the bright spots, finishing higher by 0.85%, after robust earnings outlooks from domestic firms. Whilst in China, stocks also ended the period lower due to heightened US-China tensions as Beijing condemned Washington’s decision to shoot down a Chinese balloon that traversed American airspace. The Hong Kong index was down -2.17% and the Shanghai composite finished lower by just -0.08%.
UK narrowly avoids recession
In economic news, the UK economy just managed to avoid a technical recession, defined as two consecutive quarters of negative growth. Despite negative growth in Q3, GDP growth for Q4 2022 was reported as flat according to the Office for National Statistics. This met analyst expectations, but the reading was weaker than the Bank of England’s own forecast. Despite better October and November growth, it was the month of December that wiped out gains due to widespread strikes and the cost-of-living crisis hitting households and business activity.
Government Bonds also sell off
After hawkish statements from Fed officials, as well as the stronger jobs report from last Friday, US treasury yields (which move inversely to the bond price) rose sharply. As of 11am London time, 2-year Treasury yields which are more sensitive to potential interest rate changes, rose 22bps to 4.51% whilst the 10-year benchmark yield rose 18bps to 3.70%. Equivalent 10-year German bunds and UK Gilts also suffered with their yields rising by 17bps and 32bps to trade at 2.36% and 3.37% respectively.
Oil price rises after Russia cuts production output
In response to EU sanctions and the price cap imposed on Russian oil, today the Russian government announced it would reduce production by 500,000 barrels a day to support the price and “restore market relations”. The Brent crude price jumped by 2% on the news and as of 11am London time Brent is trading at $86.15 per barrel. WTI crude is trading at $79.54 per barrel. The price had already been rising steadily over the week with recovering demand in China. In other commodity news, European natural gas futures continued to decline, with the Netherlands Natural Gas 1-month forward future falling another 8.08% this week, which will be welcome news for European consumers.