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Week in Review: ECB Follows FED

Great Britain’s longest-serving monarch, Queen Elizabeth II, died at the age of 96 on Thursday at Balmoral Castle in Scotland. Prince Charles, the eldest of the Queens four children, is now King Charles III. At 73, he is the oldest person to accede to the throne in British history. The King pledged “lifelong service” in his first televised address to the UK as monarch, in which he paid tribute to his late mother Queen Elizabeth II.

On Thursday the ECB increased its key interest rates from 0% to 0.75% in a bid to curb inflation which stood at an annual 9.1% in August. This large move shows the ECB is following in the Fed’s footsteps. “This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target,” the ECB stated in its official statement. European inflation is forecasted to fall from an average of 8.1% this year to 5.5% next year and 2.3% in 2024.

New British Prime Minister Liz Truss announced that the government would intervene to help reduce soaring energy costs for British households and businesses. Under the £150 billion plan, a typical household will pay no more than £2500 a year on energy bills. In Germany, Chancellor Olaf Scholz said the government would also spend EUR 65 billion to shield households and businesses from soaring energy costs.

Shares in Europe rose for the week, in local currency terms, the pan-European STOXX Europe 50 Index ended the week 0.72% higher, while the UK’s FTSE 100 Index increased 0.96%. Earlier in the week the British pound depreciated further against the U.S. dollar before retracing some of its losses, while the euro rose above parity with the U.S. dollar after the ECB hiked its key interest rate.

U.S. equities were also higher this week, with both the S&P 500 (+3.65%) and Nasdaq (+4.14%) making strong gains. Investor sentiment grew more confident over the week with moderating inflation fears as intra-week oil prices briefly hit their lowest level since Russia’s invasion of the Ukraine. Investors will be closely watching the U.S. consumer price index report for August, which is scheduled to be released on Tuesday. The report is especially important as it will be one of the last data points Fed leaders will see before the central bank announces its rate hike decision at its September meeting. Markets strongly expect the central bank to take up its benchmark borrowing rate by another 0.75%.

In Asia, Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 2.04% with the government announcing new measures to cope with rising inflation. China’s stock markets also rose on expectations of further policy support with the broad, capitalization-weighted Shanghai Composite Index advancing 2.37%.

 

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Market Moves of the WeekWeekly Movements 2022

 

South Africa’s balance on the current account of the balance of payments fell back into a deficit of R87-billion in the second quarter (Q2) from a surplus of R157-billion in Q1, South African Reserve Bank data showed on Thursday. Falling prices of SA commodity exports, and rising prices of the commodities imported, namely oil, were key factors adding to the rands recent weakness.

South African manufacturing output rose by 3.7% in the year to July, Statistics South Africa said on Thursday. The gain was off a low base as manufacturing was down 4.1% a year earlier given riots and violence in Durban after the jailing of former President Zuma. Compared with June, output declined marginally by 0.2%, loadshedding and logistical bottlenecks continue to be the main challenges for the sector.

Co-operative governance minister Nkosazana Dlamini-Zuma announced that she will once again challenge President Cyril Ramaphosa for the ANC leadership when the party holds its national conference in December.

The JSE all share index tracked global peers to end the week up 1.97%.  The resources sector led the gains (+5.04%), followed by the SA listed property sector (+2.41%), industrials (+1.59%), while the financial sector ended marginally down (-0.42%) over the week.

The rand ended the week at R17.31/$ after blowing out to above R17.50/$ on Thursday, it started the week around R17.30/$.

 

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Chart of the WeekHousing

 

For the first time in two years, US consumers expect home prices to fall over the next 12 months due to higher mortgage rates and recent home price gains. An August survey by the Fannie Mae Economic and Strategic Research (ESR) Group expects total home sales to decrease 16.2% in 2022. This decline represents a further downward revision from last month’s forecast of a 15.6% drop, as recent incoming data points to a faster slowdown in near-term sales than previously expected.

 

 

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