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Week in Review: Fed Talks Rates

U.S. Federal Reserve policymakers expressed a variety of interest rate views this week, after last week’s lower than expected U.S. inflation print. Governor Christopher Waller said he’d be more “comfortable” stepping down to a 50-basis point hike after the past few weeks of data, while Atlanta Fed’s Raphael Bostic mentioned there’s “glimmers of hope” that inflation may be easing, and Fed vice chair Lael Brainard said it will probably be appropriate soon to dial back the pace of hikes. St. Louis Federal Reserve President James Bullard was more hawkish saying on Thursday that “the policy rate is not yet in a zone that may be considered sufficiently restrictive.” He suggested that the appropriate zone for the federal funds rate could be in the 5% to 7% range, which is higher than what the market is pricing. Pricing for the Fed’s implied terminal rate drifted higher over the week to about 5.14% after being in the 5% range.

As anticipated the Republicans secured a narrow majority in the U.S. House of Representatives, the lower chamber of Congress a week after the midterm elections. The Republicans – who had hoped to win back control of both chambers – underperformed expectations in last week’s midterms with the Democrats managing to retain control of the Senate. While the Republicans margin in the House of Representatives is slim, it will be enough to stall President Biden’s agenda for the next two years.

On Tuesday night, former U.S. president Donald Trump formally announced a third bid for the White House in 2024 from his Mar-a-Lago estate in Florida.

On Thursday, UK Chancellor of the Exchequer Jeremy Hunt unveiled a £55 billion budget consolidation package of tax hikes and spending cuts with government raising taxes by GBP 25 billion and cutting spending by GBP 30 billion by 2027–2028. On Friday, European Central Bank President Christine Lagarde said that interest rates may need to rise to levels that restrict economic expansion to drive down inflation. Shares in Europe and the UK ended the week modestly higher in local currency terms, with Euro Stoxx 50 advancing 1.46%, and the UK’s FTSE 100 Index rising 0.92%.

Earlier in the week China’s leader Xi Jinping and President Biden met face-to-face on the sidelines of the Group of 20 summit in Bali, Indonesia, on Monday evening. Their three hour discussion touched on the war in Ukraine, military tension in the Taiwan Strait and North Korean missile tests and while Biden and Xi did not resolve any key issues both leaders expressed an openness to restoring channels of communication. Biden said he and Xi were “very blunt with one another.” Xi, according to his spokesperson, viewed the meeting as “in-depth, candid and constructive.” The meeting appeared to boost investor sentiment and was the first face-to-face exchange between the two since Biden became president.

All of the major U.S. averages posted losses for the week. The Dow ended 0.01% lower. The S&P 500 lost 0.69% for the week, while the Nasdaq ended 1.57% lower. In Asia, Japanese equity markets also fell over the week, with the Nikkei 225 Index declining 1.29%, while the Shanghai Composite Index in China rose 0.32% for the week.

Market Moves of the Week:

Retail trade sales in South Africa declined by 1.9% in the third quarter (Q3), data released by Statistics South Africa (Stats SA) showed on Wednesday, the second straight quarterly decline on the retail front. The weaker retail sales are in line with a tough consumer environment with rising interest rates curbing demand and the high unemployment rate.

Eskom, implemented Stage 4 rolling blackouts on Friday as a number of generating units at power stations went down and also because of the lack of emergency generating capacity – a large part of which is provided by diesel generators.

Late Friday, S&P Global Ratings retained its positive outlook on SA’s credit rating, citing the country’s strong financial markets and an improved fiscal and debt position. “Although power and logistical bottlenecks continue to weigh on the economy, we expect that government measures to increase private sector activity and reform some key government-related enterprises could support stronger growth outcomes over the next two to three years,” it said.

South Africa’s Reserve Bank is widely expected to hike its repo rate by another 75 basis points to 7.00% when it meets next week Thursday, a Reuters poll found on Friday. A majority of economists polled in the last week, 12 of 20, predicted another 75 basis point hike. Seven expected a half-point move while one expected a full percent. South Africa’s headline consumer inflation slowed for a second month in a row in September to 7.5% from 7.6% in August. It is expected to slow again next week when Stats SA releases figures for October. Inflation in South Africa is estimated to average 6.8% this year, above the SARB’s 3%-6% target range but projected to slow to 5.4% next year and to 4.6% in 2024.

The JSE ended the week lower with the all-share index giving up 0.56%, mainly pushed lower by resource counters as global risk appetite moderated after more hawkish remarks from U.S. Federal Reserve officials. By Friday close, the rand was trading at similar levels to the previous week’s close, trading at R17.25 to the U.S. Dollar.

Weekly Movements 19 Nov2022

Chart of the Week:

The Federal Reserve’s implied terminal rate drifted higher over the week to about 5.14% after being in the 5% range. The final Federal Open Market Committee meeting of 2022 is scheduled for the 13-14th December and is expected to see a smaller hike of 50 basis points.

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