Week in Review: The Fed Hikes Rates by 75 bps

The Federal Reserve delivered its most aggressive rate hike since 1994 this week, hiking rates by 75 basis points. This follows last week’s U.S. inflation print of 8.6% from a year ago, which topped estimates. Federal Reserve Chair, Jerome Powell had previously signalled at his post-meeting press conference in early May that the Fed would move forward with 50 basis point rate hikes in June and July, providing economic data came in as expected.

Recession fears have increased considerably in recent weeks, with JPMorgan Chase & Co. strategists indicating that the S&P 500 now implies an 85% chance of a U.S. recession amid fears of a policy error by the Federal Reserve. The warning is based on the average 26% decline for the S&P 500 Index during the past 11 recessions and follows its recent decline of more than 20% into bear market territory, amid concerns about surging inflation and aggressive interest rate hikes.

The pinch of higher interest rates is starting to reflect in U.S. housing data. Housing starts declined by 14.4% in May, the biggest decrease since the pandemic began. At the same time, weekly jobless claims came in higher than expected (229,000 versus 215,000).

The Bank of England (BoE) raised rates by 25 basis points this week, to 1.25%, with three of its nine member policymakers calling for a 50-basis-point increase. The BoE revised its inflation outlook higher, projecting that the year-over-year change in consumer prices would be slightly above 11% in October and downgraded its economic outlook for an economic contraction of 0.3% in the second quarter, as opposed to the 0.1% expansion projected in the BoE’s May policy report.

In an unexpected move, the Swiss National Bank raised interest rates for the first time in 15 years, by 50 basis points to -0.25%. Japan meanwhile maintained its ultra-easy monetary stance, continuing its policy divergence with its global peers.

Chinese economic data released during the week, showed some improvement. Industrial production, retail sales, fixed asset investments and property investments all came in ahead of market estimates.

The U.S.’s largest crypto exchange, Coinbase Global, announced that it will fire 18% of its workforce. In the past weeks, the crypto market has plunged into turmoil after the Terra stablecoin collapse and crypto lender Celsius Network freezing withdrawals amid what looks like the digital equivalent of a bank run. Bitcoin dropped below $21,000 this week, down -55.85% year-to-date.

Global equities were under pressure. In the U.S., the Dow Jones (-4.79%), S&P 500 (-5.79%) and Nasdaq (-4.78%) were all sharply negative. Similarly, the Euro Stoxx 50 (-4.47%), FTSE 100 (-4.12%) and Nikkei 225 (-6.69%) were all weaker. The exception was the Shanghai Composite Index (+0.97%) ending the week stronger. The price of brent crude oil decreased by -6.82% this week to USD 113.61 a barrel.

Market Moves of the Week

South African news flow was limited, after the country celebrated Youth Day. Retail sales recorded an increase of 3.4% in April (year-on-year), ahead of the market’s expectations of a 1.6% increase.

The JSE All-Share Index ended the week down -3.56%, with all three of the major sectors selling off, including industrial (-2.57%), resource (-6.29%) and financial (-1.92%) shares all weaker. By Friday close, the rand was trading at R16.03 to the U.S. Dollar.

Chart of the Week

The Federal Open Market Committee (FOMC) has profoundly changed its monetary policy outlook in the U.S. in recent months. The best illustration of this can be found in the Federal Reserve’s “dot plot” publications. On the left is the “dot plot” published by the FOMC at its December meeting. On the right is the latest revision released this week. Six months ago, only two FOMC members thought the fed funds rate would even top 1% this year. Now, there is unanimity that it will surpass 3%. Source: Bloomberg