Strong service sector data raises expectations of further rate hikes
Equity and bond markets sold off this week as strong data released for the service sector, in the US and Europe, raised concerns as to further interest rate hikes. Minutes from the latest Federal Reserve meeting also showed overwhelming support for the 0.25% rate hike, with some governors pushing for larger increases. The latest US inflation data is due out later today, with expectations that the month over month data will have risen over January.
As of 12pm on Friday, London time, US equities fell 1.6% over the week, with the US technology sector falling 1.7%. European equities dropped 0.5%, whilst UK stocks lost 1.1%. The Japanese market sold off by 0.2% and Australian stocks dropped by 0.5%. The emerging markets fell by 1.2%, with offshore Chinese stocks selling off by 3.4%, but onshore ‘A’ shares rising by 1.3%.
US Treasuries sold off, with the yield on the 10-year, which moves inversely to price, rising to 3.91%. German bunds and UK gilts also sold off, with the 10-year yield rising to 2.50% and 3.60% respectively.
Similarly, most commodities also declined, with gold falling by 1.4%, now trading at $1,823 an ounce, copper fell 0.7% to $8,884 a tonne and crude oil fell, with Brent crude currently trading at $82.8 a barrel.
The US dollar rose on the back of further rate rises, with the dollar appreciating by 1.2% versus the Euro, now trading at $1.06, and by 0.5% versus Sterling, now trading at $1.20.
Earlier in the week service sector purchasing manager’s indices (PMI) were released, which seek to understand the operating environment companies find themselves in and are frequently considered a good lead indicator by investors. The manufacturing PMI remained below 50, indicating contraction, whilst the service sector PMI jumped back above 50, coming in at 50.2, versus 46.8 at the last reading. It was a similar story in Europe, with the manufacturing PMI remaining below 50, whilst the Service sector PMI came in at 53.0, higher than both last month’s reading of 50.8 and forecasts of 51.0. Even the UK’s service sector PMI jumped above 50, coming in at 53.3, versus 48.7 for the previous month. The continued strength in the service sector, combined with inflation remaining well above central bank targets, and very low levels of unemployment combined with rising wages, is raising expectations for further interest hikes, despite it being well recognised that monetary policy acts with a lag.