After two years of holding borrowing costs near zero, the Federal Reserve took the first step towards normalising its policy, hiking interest rates by 0.25% this week. Despite geopolitical uncertainties, the Fed signalled that it intends to press on with a series of rate hikes to fight inflation, which last month hit a 40-year high.
The hike is likely the first in a series to come, signalling that rate hikes are possible at all its six remaining meetings this year. Fed officials expect to raise rates as high as 2.8% by the end of this tightening campaign, depending on the trajectory of economic growth and inflation which remains data dependent.
Besides the Fed’s announcement, U.S. economic data seemed to have a limited impact this week, with markets more focused on falling oil prices, Russia temporarily avoiding a debt default, reports of negotiations of a possible Russia-Ukraine ceasefire and China vowing that it is not interested in getting involved in Russia’s war.
It was a volatile week for Chinese shares as investors weighed-up attractive valuations against a persistent regulatory overhang and concerns over Beijing’s ties with Russia. After a sharp sell-off early in the week, Chinese technology shares stagged a sharp rebound after Chinese officials made a strong push to stabilise battered financial markets, promising to ease its regulatory crackdown, support property and technology companies and stimulate the economy.
On Friday, Chinese leader Xi Jinping assured U.S. President Joe Biden that he didn’t want war in Ukraine, but that he doesn’t approve of sanctions, either. During the highly anticipated call, Biden warned Xi of “implications and consequences” should China move to provide support for Putin’s war.
China reported better-than-expected activity in the January-February period with help from policy easing. Industrial output grew 7.5% (4.0% expected) in the two months through February, compared with 4.3% in December. Retail sales rose 6.7% (3.0% expected), accelerating from 1.7% in December. Investment climbed 12.2% during the two-month period, better than the 5% estimate. Morgan Stanley however cut China’s GDP growth forecast for Q1 2022 to zero due to Covid and predicts Beijing will miss its annual target this year. The Wall Street bank lowered its 2022 forecast to a 5.1% gain for gross domestic product, below the Chinese leadership’s target of about 5.5%.
The Bank of England (BoE) hiked interest rates by 0.25% to 0.75%, in line with the market’s expectations. The central bank now expects inflation to reach 8% by the end of June, in part due to Russia’s invasion of Ukraine but acknowledged “there were risks on both sides of that judgment depending on how medium-term prospects evolved.” Markets interpreted the language to be more dovish in tone. U.K. unemployment improved to 3.9% in January, ahead of expectations and the previous reading of 4.1%.
Europe’s economic sentiment index plunged to -38.70 in March, from 48.60 in February, with concerns of a recession becoming more likely as the war in Ukraine and the sanctions against Russia are significantly dampening the economic outlook for the region.
Russia appears to have sidestepped a historic debt default, after the Kremlin said it ordered the $117 million in interest payments it owes on two dollar-denominated Eurobonds to be sent to investors. Russia had until the end of business on Wednesday to pay interest on two sovereign Eurobonds, failing which could have paved the way for Russia’s first foreign currency debt default in more than a century. Moscow’s willingness and ability to repay its international debt are however likely to be tested in the coming weeks.
Global equity markets rebounded sharply this week. In the U.S., the Dow Jones (+5.50%), S&P 500 (+6.21%) and Nasdaq (+8.18%) ended the week stronger. European and Asian shares also made strong gains, with the Euro Stoxx 50 (+5.85%), FTSE 100 (+3.48%) and Nikkei 225 (+6.62%) all positive, whilst the Shanghai Composite Index (-1.77%) was the market’s outlier.
Market Moves of the Week
South Africa’s consumer confidence index fell to a level of -13.00 in the first quarter of 2022. This compares to a reading of -9.00 in the previous quarter. The latest reading remains well below the long-run average reading of +2 since 1994, signalling an increased caution of South Africans to spend. Russia’s military invasion of Ukraine and the economic ramifications have shaken consumer confidence levels around the globe.
Eskom sees about a third of its coal-fired capacity being unavailable at any one time under a most likely scenario. This will require it to spend R20.9 billion on fuelling its open-cycle gas turbines in the 13 months through April next year. Eskom has forecast that its debt will rise to R416 billion by the end of this month.
JSE listed financial and industrial companies posted strong returns for the week. The JSE All-Share Index ended the week up +1.58%, with the financial (+5.08%) and industrial (+4.09%) sectors strongly positive, against a weaker resource sector (-2.53%) performance. By Friday close, the rand was trading at R14.97 to the U.S. Dollar.
Chart of the Week
The Federal Reserve raised the fed funds rate for the first time in four years, but the 25-basis-points hike wasn’t the surprise. Rather, the hawkish element came in the accompanying “dot plot”. The Federal Reserve’s so-called dot plot, which the U.S. central bank uses to signal its outlook for the path of interest rates, showed that officials expect to raise the fed funds rate six more times this year, based on median projections. Source: Bloomberg.