Week in Review: A More Hawkish Fed

Financial markets focused on the Fed this week, awaiting its latest policy decision and outlook – a decision that drew particular attention given the current inflation environment. The Fed intensified its battle against U.S. inflation by moving to end their asset-buying program earlier and signalled that they favour raising interest rates in 2022 at a faster pace than expected. At the same time, the Fed kept its interest rate steady at 0.25%, in line with market expectations.

The results from initial studies of the omicron variant of the coronavirus are starting to become available. The mutation is much better at infecting – 70 times faster than delta and the original strain. However, the severity of illness is likely to be more muted compared to other variants. This was according to a study from the University of Hong Kong, where omicron’s spread in the human bronchus was found 24 hours following infection. However, the study found it replicated in lung tissue much less efficiently than earlier mutations, which may signal “lower severity of disease.”

President Joe Biden signed a debt ceiling increase into law, preventing the first-ever U.S. default. The measure increases the nation’s debt ceiling by $2.5 trillion, an amount intended to extend the government’s borrowing ability until early 2023.

The Bank of England (BoE) hiked interest rates this week from a record low of 0.1% to 0.25%, the first such move by any major central bank since the start of the pandemic. Governor Andrew Bailey said an outlook for “more persistent” inflation was behind the surprise decision to raise interest rates for the first time in three years. This comes after inflation surged to its highest level in more than a decade in November, to 5.1%. U.K. unemployment decreased to 4.2% in October, compared with a reading of 4.3% in the previous month.

In Europe, the ECB kept its main policy rate unchanged. It also said it would end its emergency asset purchase program in March but temporarily increase its Asset Purchase Program to smooth the transition. The ECB signalled that any exit from ultra-easy monetary policy would be slow, as the pandemic was again depressing business and consumer sentiment and threatening economic growth.

China reported that retail sales in November increased by 3.9%, lower than market expectations of an increase of 4.6%. At the same time annual industrial production advanced by 3.8%, compared to an increase of 3.5% in the prior month. The market expected industrial production to increase by 3.6%.

Hong Kong researchers announced that the vaccine made by Sinovac Biotech Ltd., one of the most widely used vaccines in the world, doesn’t provide sufficient antibodies to neutralise the omicron variant, based on initial lab findings. Among a group of 25 people fully vaccinated with the Sinovac’s vaccine, none showed sufficient antibodies in their blood serum to neutralise the omicron variant.

Global equities were weaker this week. In the U.S., the Dow Jones (-1.68%), S&P 500 (-1.94%) and Nasdaq (-2.95%) were all in negative territory. Similarly, the Euro Stoxx 50 (-0.90%), FTSE 100 (-0.30%) and Shanghai Composite Index (-0.93%) were all negative. The exception was the Nikkei (+0.38%), ending the week marginally stronger.

Market Moves of the Week

South African headline inflation increased from 5.0% in October to 5.5% in November. A sharp increase in fuel inflation (from 23% to 35%) explains the increase in headline inflation, which was partially offset by a decline in food inflation (from 6.1% to 5.5%).

South Africa, along with 10 other countries were removed off the U.K.’s Covid-19 red list, paving a way for the reopening of travel to South Africa and other countries just as the peak Christmas season gets underway. Other countries include Angola, Botswana, Eswatini, Lesotho, Malawi, Mozambique, Namibia, Nigeria, Zambia and Zimbabwe.

The JSE All-Share Index ended the week down -0.67%, led lower by industrial shares (-3.42%). Financial (+2.05%) and resource (+0.79%) shares were stronger. By Friday close, the rand was trading at R15.92 to the U.S. Dollar.

Chart of the Week

According to the Bank of America Securities Fund Manager Survey, investors now consider the risk of central banks turning more hawkish towards hiking interest rates as the biggest tail risk facing financial markets. Sentiment has firmed since November that investors should brace for three Fed rate hikes in 2022.