Weekly Market Wrap 02/09/2022

Euro zone inflation reaches yet another record high, solidifying the case for further large rate hikes in the coming months whilst the European energy crisis could take a turn for the worse after Russia temporarily reduces supplies to Europe. China has shown the world it will not cease with the country’s “Zero-Covid” policy after the city of Chengdu and its 21 million residents were placed into lockdown after 157 new infections were reported. The continued use of China’s strict policy and rules surrounding covid has rekindled fears from investors that Chinese economic growth could be significantly impacted. US jobs data showed a slight increase in unemployment whilst payrolls increased roughly in line with expectations. Finance ministers of the G7 have agreed a price cap on Russian oil, in an attempt to reduce money flowing to Moscow that will be used to fund their Invasion of Ukraine.

US Markets 

The S&P 500 is currently ending the week down 1.68% at 3,990 and the NASDAQ is down 2.23% at 12,326 Focus this week has been on how aggressively the Federal Reserve is expected to move with rate hikes in the coming months. Chairman Powell’s comments at last week’s Jackson Hole symposium warned the US to expect “pain and job losses” as the Fed reinforces its stance to bring down Inflation despite consequences on the economy. These comments were followed by Loretta Mester, the President of Cleveland Federal Reserve Bank, who told investors that that Fed would need to raise rates above 4% by early 2023 and hold them at that level in order to combat inflation. These comments drove negative sentiment in equity markets at the start of the week. The US unemployment rate rose to 3.7% in August, ahead of the estimated figure of 3.5%, however this increase was due to an increase in labor force participation and not driven by actual job losses. Nonfarm payrolls showed an increase of 315,000, ahead of the consensus which was 300,000. Futures rallied on the news as the rise in unemployment and the reduction in wage increases eased some concerns around rate hikes. A 50bp increase remains a possibility for the Fed’s September meeting, after the market had begun leaning towards a 75bp move.

UK Market   

The UK market ended this week lower, ahead of Monday’s announcement of the UK’s next Prime Minister. Liz Truss is widely expected to win the party members vote and will be required to tackle a range of issues including the worst cost of living crisis in a generation as well as division within the Conservative party itself. Many have been critical of Truss’s proposal to cut taxes which some fear could worsen the UK’s rapidly growing inflation problem.

European Markets   

The Euro Stoxx 50 fell 2.67% to 3,508, the DAX was down 0.62% at 12,895 whilst the CAC 40 lost 2.57%, reaching 6,113. European inflation data came in higher than expected, (9.1% vs Est 9%), setting another record high. The latest data released has strengthened the ECB’s case for further rate hikes in the near future, as inflation persists well above the bank’s 2% target. Some ECB policymakers are making the case for a 75bp increase in the central bank’s policy rate and the market is currently pricing in a 75bp move, whereas a 50bp move was favoured until Wednesday’s inflation data was released. France has accused Russia of using energy supplies as “a weapon of war” after Europe was informed that that supplies would be reduced as Gazprom shuts Nord Stream 1 from Wednesday to Friday, stating maintenance as the reason for the closure.

Fixed Income  

Yields on the US 10-Year Treasury rose to 3.22%, as a number of Federal Reserve officials echoed Jerome Powell’s sentiment that higher rates would need to be present for longer to combat inflation. Investors now anticipate a 75bp rate hike at the Fed’s September meeting, although Friday’s job’s data has reopened the case for a 50bp move. 

Commodities 

Brent Crude fell 5.70% this week, as China’s new lockdown measures have pushed demand forecasts lower. However, oil recovered slightly on Friday ahead of next week’s OPEC+ meeting that will discuss cutting global output. 

The Week Ahead   

Monday – US & Canada Labor Day

Tuesday – US Services PMI

Wednesday – Euro Zone GDP

Thursday – ECB Rate Decision, US Initial Jobless Claims

Friday – China CPI

*Price changes as of last week’s close unless stated otherwise.