US: The US Federal Reserve (the ‘Fed’) is widely expected to leave interest rates steady this week when it meets at its regular 6-weekly meeting. Policy makers on the Federal Open Market Committee (the body that sets interest rates) have indicated they do not expect interest rates to rise at the conclusion of the two-day meeting. That would mark the second consecutive pause in interest rates since the Fed lifted them to 5.00-5.25% in July (the key Fed Funds rate trades in a quarter-point target range set by the Fed).
The US 10-year bond yield recently surpassed 5 per cent for the first time since 2007, raising general borrowing costs e.g. corporates and many others. Rising international bond yields and geopolitical concerns – notwithstanding the potential impact on energy prices of the latter – perhaps limit the need for the Fed to raise short term interest rates also.
Over the past 2 months, US government bonds have repriced lower on a steady stream of strong economic data, worries over the size of the American fiscal deficit and warnings from the US Federal Reserve that interest rates will stay “higher for longer”. These concerns have rattled investors who are banking for a soft landing (i.e. no recession) for the world’s biggest economy. US stocks, including riskier assets such as tech stocks, have also fallen sharply over the past few weeks, also not helped by Middle Eastern geopolitical developments. The combination of a move up in the oil price due the latter (Oil at $88 per barrel), bond yields/interest rates up, and a subsequent strong US dollar – up 6.4% since mid-July hurting US exports – is a challenging environment for equity markets.
The US Federal Reserve’s preferred measure of inflation (not headline) – the ‘core’ personal consumption expenditure index fell to an annualised rate of 3.7% last month – its lowest level for 3 years.
UK: The Bank of England meet this week and are likely to hold interest rates unchanged at their highest levels (5.25%) since the 2008 financial crisis with consumer price inflation firmer than many expected last month at 6.7%. Indeed, UK headline inflation is expected to remain higher this year and next than many of the country’s biggest trading partners, including US, Germany and France. Inflationary pressures are more widespread in UK. According to Goldman Sachs, with 67% of the categories comprising the consumer prices basket running above a 4 per cent annualised pace.
Eurozone inflation is expected to drop to 3.4% this week – the slowest rate for 2 years.
Central Banks around the world are treading fine lines as they attempt to quell the worst inflationary upsurge in a generation without tipping their economy into deep recessions.
Commodities: Oil boosted by Middle East concerns which is also supporting the gold price ($1,975 dollars per ounce). Gold is a safe-haven asset which does poorly when bond yields are high like now (as a bar of gold does not pay any interest) and behaves well during times of global conflict and uncertainty which is the dominant price influence right now as. Gold has been around for 5,000 years as a means of investment which attracts investors in uncertain times.