The trio of big central banks, namely the U.S. Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) all raised rates at their early February meetings this week.
On Wednesday the Fed announced that it was raising its target rate by 25 basis points, as was widely expected. The hike was the eighth in succession. The Fed’s latest hike brings the Federal funds rate to a range of 4.50% to 4.75%. At the press conference following the interest rate announcement, Fed Chair Jerome Powell said that the economy’s disinflationary process had started but that it may be premature to declare victory against inflation. Investors seemed to interpret the overall tone of his remarks to be more dovish as major U.S. indices responded positively.
On Thursday the ECB followed by lifting interest rates by 50 basis points (bps) and pledged another hike by the same amount next month. The decision, which was also widely expected by markets, brings the lending benchmark deposit rate to 2.50%. The Eurozone unexpectedly grew in the fourth quarter, defying expectations that the ECB’s aggressive rate hikes in 2022 would spark a deep recession in the near term. The latest data showed the headline rate of inflation in the eurozone cooled more than expected in January to an annual rate of 8.5%, from 9.2% the previous month.
The Bank of England also hiked its interest rate for a tenth time in a row on Thursday. It also announced a 50 basis-point hike, as most had expected, to 4.0 percent, the highest level since late 2008. It warned that its battle against inflation was not over, but also said a UK recession was likely to be “much shallower” than forecast in November, largely due to a drop in energy prices.
U.S. job growth accelerated more than expected in January, boosted by a jump in leisure and hospitality employment. The January Labor Report released on Friday saw 517,000 jobs added in January, almost three times the Dow Jones estimate of 187,000. The unemployment rate fell to 3.4%, the lowest since May 1969. More importantly to the Fed, wage growth continued to soften, despite the strong job gains. Average hourly earnings grew 4.4% in January from a year earlier, down from a revised 4.8% in December. The buoyant labor market in January contrasts against spending and growth figures that suggested a more mixed picture of U.S. economic health at the end of last year.
In corporate earnings news, Meta raised investor hopes on Wednesday by beating revenue expectations for the fourth quarter, but Thursday saw major tech companies Apple, Alphabet and Amazon all reporting earnings that disappointed in some way. Google parent Alphabet suffered from a decline in ad spending at YouTube, Amazon offered soft guidance while Apple’s sales fell more than analysts predicted during the holiday quarter, with lower-than-expected purchases of iPhones and Macs.
Investors are also watching the fallout from this week’s plunge in shares of India’s Adani group after market losses amounted to more than $108 billion in the wake of a U.S. short-sellers report. The report accused Adani of accounting fraud and artificially boosting its share prices, calling it a “brazen stock manipulation and accounting fraud scheme” and “the largest con in corporate history”. Adani on Friday called the allegations “baseless”.
U.S. stocks fell Friday as a strong jobs report worried some investors that the Fed would need to keep hiking rates. Still, the S&P 500 notched its fourth weekly gain ending the week higher by 1.62%, the Nasdaq Composite gained 3.31%, posting its fifth-straight winning week, while the Dow was the outlier, ending the week down 0.15%.
Shares in Europe also rose for the week on hopes that central banks may be nearing the end of the most restrictive phase of this monetary tightening cycle. In local currency terms, the pan-European STOXX Europe 50 Index ended the week 1.91% higher, while the UK’s FTSE 100 Index climbed 1.76%.
In Asia, Japan’s benchmark Nikkei 225 Index ended 0.46% stronger, while Chinese equities (Shanghai Composite) were marginally down (-0.04%) in the first full week of trading after the Lunar New Year holiday.
Market Moves of the Week:
The International Monetary Fund (IMF) this week raised its growth forecasts for the global economy slightly for 2023 to 2.9% from 2.7% in its October World Economic Outlook report. It also raised its forecast for South African growth by 0.1 percentage point to 1.2%. The driving forces behind the upward revision were China’s reopening and the ebbing of worldwide inflation pressures. The IMF noted that growth in South Africa is expected to halve in 2023, “reflecting weaker external demand, power shortages, and structural constraints”. The growth forecast stands in stark contrast to the 0.3% forecast made recently by the South African Reserve Bank.
South Africa’s energy crisis is expected to be top of the agenda for President Ramaphosa’s State of The Nation Address (SONA) on 9 February. The SONA aims to inform the public about the government’s planned priorities for the year ahead.
The JSE’s All-Share Index ended the week -0.68% lower, dragged lower by the resource sector (-3.45%). The rand weakened on Friday, along with other emerging market currencies, on the back of the stronger than expected U.S. jobs report. The rand ended the week at R17.47/$.
Chart of the Week:
This is how the projected course of the fed funds rate over the next 12 months changed from Tuesday to Wednesday, according to Bloomberg’s analysis of fed funds futures. Fed Chair Powell reiterated that he thought it was easier to correct course after an over-tightening than to deal with the consequences of easing too soon. But in responses during his press conference he appeared to confirm to the market that if inflation does come down reasonably quickly, rates would follow.