Equities | Europe | Monetary Policy & Inflation | US
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
Any quietness at the start of last week was quickly reversed into Friday. The day began supportive of risk assets after a goldilocks non-farm payrolls (headline: 315k vs 298k exp.; unemployment: 3.7% vs 3.5% exp.). Equities performed well as markets curtailed the chance of a 75bp hike at the September FOMC meeting. However, it failed to last. As Europe considered a price cap on energy markets, Russia retaliated. The previously temporary Nord Stream stoppage suddenly became indefinite. Positive risk appetite unwound. The USD ended the week up against G10 while equities and commodities suffered (Charts 1 and 3).
The battle over gas flows is likely to continue with EU energy ministers expected to discuss the official details at an extraordinary meeting on Friday. As a result, countries are preparing; Germany announced a €65bn support package for businesses and consumers while Finland and Sweden are prepared to offer liquidity guarantees to utility companies. It comes as nine countries across the Eurozone posted double-digit inflation in August.
Focusing on rates, in the UK, markets are yet to be satisfied with hawkish Bank of England pricing (Chart 2). Meanwhile, in China, 2Y yields continue to retreat as the number of lockdowns increased.
The Week Ahead
US markets are closed today for Labor Day, and they likely remain quiet for the rest of the week too. However, the same cannot be said elsewhere, a big event is scheduled for each day of the week with the ECB headlining on Thursday.
Today, Liz Truss became the leader of the UK Conservative Party, and with that, the UK PM. Her first port of call will be to organise her Cabinet and set out a clear path for how to resolve the growing cost-of-living crisis. And while she must deliver something large on that front, what form it takes is unclear. She has previously been averse to simply capping energy price rises as well as imposing wind-fall taxes on energy profit, but such options now look increasingly attractive..
Focus just a day later will travel ‘Down Under’; we expect the Reserve Bank of Australia to hike the cash rate to 2.35% (+50bp). However, at this stage, it will be 15bp short of ‘neutral’, and with the central bank aiming for a soft landing, they could likely tail back the moves to 25bp thereafter.
By mid-week markets will be concentrating on the Bank of Canada. We expect them to raise the policy rate to 3.25% (+75bp), a continuation of their plan to ‘front load the path to higher interest rates’ as they move rates above neutral (3%).
And on Thursday, we will find out whether the ECB will hike 75bp! Markets are unsure, pricing a 67bp move, while we lean marginally in favour of a 75bp hike; there are several clear reasons why we expected this hawkishness. Furthermore, we believe the time has come for President Lagarde to drop ‘roughly neutral’ as an end goal, and, instead, open the doors to hiking into restrictive territory (~>2%). However, given how high yields have become in the European periphery, we do not believe the time has come for serious talk of quantitative tightening.
We finish the week with an extraordinary meeting. Europe, particularly the likes of Germany, face an increasingly difficult situation. On one hand, the rising cost of energy threatens their economy and price caps are hence attractive. On the other hand, however, is the more serious issue of facing a gas shortage into the end of the year, which will only be worsened by artificially cheap energy. The challenge may test the limits of EU commitment to Ukraine and one another. Historically, however, that is when most progress is made by the bloc.
For further analysis, see our week-ahead preview, and watch Andrew and Dominique discuss the interpretation of recent data, how European growth numbers have held up, and why the strong dollar is not having more of an impact.
Ben Ford is Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.