On Friday (September 30), the U.S. dollar index rose and fell, but its overall trend was still strong. The market intervention of central banks has temporarily eased concerns about a substantial strengthening of the dollar, while the market continues to digest the prospect of future interest rate hikes by the Federal Reserve. In other non-US areas, the hawkish tone of the European Central Bank limited the downside of the euro, and the Bank of England intervened in the market to support the pound.
Next week, the Chinese market will be closed for the National Day holiday, and the European and American markets will continue to operate as usual. Among them, the US non-farm payrolls report will become the focus of the market. At the same time, investors should also pay attention to the impact of possible unexpected central bank intervention, geopolitical situation, global epidemic and other uncertain factors on the market.
The U.S. dollar index rose and fell. The Bank of England and Japan’s rescue actions eased market pressure. At the same time, the market continued to digest the prospect of the Federal Reserve raising interest rates. Concerns about the global economic slowdown continued to support the safe-haven dollar.
Figure: US index daily chart trend
The Bank of England and Japan’s bailout eases market pressure, and the dollar temporarily adjusts
The Bank of England’s bailout may temporarily ease the upward pressure and sentiment on the yields of government bonds in the United Kingdom, the United States and other countries around the world. It has never been seen that the way the central banks of major developed economies raise interest rates will still bring pressure on the bond and foreign exchange markets. If the UK and the European Central Bank also actively tighten in the fourth quarter of this year, the weakening of short-term arbitrage factors can ease the pressure on the global financial market from the rise of the US dollar index, but at the same time, due to the rise in interest rates in these economies, it will also bring risks of cross-border capital flows.
The Bank of England issued a statement on the 28th that it would temporarily purchase long-term British government bonds “at any necessary scale” to restore market order, and British government bonds rose across the board. The Bank of England will purchase British government bonds with a remaining maturity of more than 20 years in the secondary market. The bond purchase period will last from September 28 to October 14. Once the risk of market operation is judged to have subsided, the Bank of England will be stable and stable. Exit bond purchases in an orderly manner. The Bank of England also emphasized that the quantitative tightening plan to reduce its holdings of British government bonds by 80 billion pounds per year remains unchanged, but the British government bond sales plan originally scheduled to start next week will be postponed to October 31.
Kyodo News reported on September 26 that the Japanese government’s intervention in the foreign exchange market on the 22nd may reach 3 trillion yen (about 147.8 billion yuan), a record high. The Governor of the Bank of Japan said at a press conference held in Osaka on the 26th that this foreign exchange intervention is a necessary measure to implement excessive fluctuations in the yen exchange rate. take further action. Once the yen becomes “excessive” due to speculation, the government will intervene again if necessary.
The market continues to digest the prospect of the Fed raising interest rates, and the dollar falls short-term and adjusts
The current Fed rate hike of 75 basis points on November 2 has been almost completely priced in by the market, and the 50 basis point hike on December 14 has also been priced in. The dollar saw some corrections in the short term.
On Thursday, Fed officials reiterated that they will continue to raise interest rates to curb unacceptably high inflation, and markets have now understood that message. Cleveland Fed President Mester said she did not think the U.S. financial market was in trouble, and the Fed would not change its current tightening policy for the time being.
While no one knows for sure if a big problem is lurking in finance right now, so far we haven’t seen a dysfunctional market, Mester said. Even though that’s happening in the global market right now, we’re not seeing that in the U.S. market. Mester also addressed volatile market conditions around the world. A day earlier, the Bank of England announced a plan to buy government bonds in an effort to stabilize the falling British government bond market, putting more pressure on the government led by the new Prime Minister Truss. Mester insisted that she sees no reason to slow rate hikes now. She noted that at last week’s policy meeting, officials set a higher path for the federal funds target rate to reach 4.6 percent next year. Mester expects the Fed may need to raise interest rates further.
Previously, Fed Evans said that the Fed’s policy interest rate has begun to enter a restrictive range, but it is far from a restrictive level; at the end of this year or next March, the Fed’s policy interest rate is between 4.5% and 4.75%. Good target; there is now consensus that policy rates should continue to rise, and it is expected that at some point the Fed will have to slow the pace of rate hikes a bit.
The Fed’s Bostic said that inflation is too high and not falling fast enough, and the Fed’s policy stance must remain moderately restrictive. The current baseline is to raise interest rates by 75 basis points in November and 50 basis points in December. Interest rates will reach a range of 4.25%-4.5% by the end of the year. The Fed’s delicate balance between curbing demand to slow inflation without triggering a recession will be a “fight”, Fed’s Daly said in a speech. She hopes the Fed’s actions to curb demand will meet the supply chain recovery “halfway”, but that may not be possible.
The Fed previously raised interest rates by 75 basis points to 3.00-3.25% as scheduled. Economic expectations suggest that the pace of interest rate hikes may further accelerate in the future. The Fed’s FOMC September dot plot shows that the Fed expects to raise rates by at least 75 basis points in 2022 and not cut rates until 2024. Federal Reserve Chairman Jerome Powell said at a news conference after the meeting on interest rates that he is firmly committed to reducing inflation, promising to keep inflation down to 2%. At the same time, Powell cited the differentiation of the FOMC interest rate dot plot and said that the Fed will raise interest rates by 100-125 basis points in 2022. In addition, ECB Deputy President Jindos said that recent data indicate that the economy has slowed down sharply and may stagnate around the end of the year; inflation risks are on the rise, and interest rates will continue to be raised, and the scale of interest rate hikes will be determined by the data. The Fed’s decision statement is hawkish and Fed officials continue to issue hawkish remarks, especially Powell said that the Fed will raise interest rates by 100-125 basis points in 2022, and there are still two interest rate meetings left this year, so the pace of subsequent sharp interest rate hikes by the Fed is still likely to be Continuing, US bond yields and the US dollar index are still running at a high level.
Safe-haven dollar demand remains strong amid global slowdown fears
Fears of a global economic slowdown are mounting as major central banks continue to raise interest rates sharply. The Federal Reserve raised interest rates by 75 basis points last week, and other major central banks in the world raised interest rates by 425 basis points, intensifying market concerns about the prospect of a recession and clouding the outlook for crude oil demand. Therefore, international oil prices remain on the defensive, as lower demand means lower prices. Economic demand will be hit as more central banks are forced to take unconventional measures, regardless of the cost to economic growth, sources said, which could help to rebalance the crude oil market.
U.S. homebuilding permits fell 10.0% in August, the lowest level since June 2020. It’s one of the more forward-looking housing market indicators that suggests the industry is at great risk ahead. The yield on the benchmark 10-year U.S. Treasury note hit 3.56 percent, the highest since April 2011, and the closely-watched 2-year/10-year yield spread, a leading indicator of a recession, inverted further. The U.S. economy is expected to grow at an annual rate of 0.3 percent in the third quarter, down from a previous forecast of 0.5 percent, according to the Atlanta Federal Reserve’s GDPNow forecast. In the report, the Atlanta Fed explained that following the release of the U.S. Census Bureau’s housing starts report this morning, the third-quarter residential investment growth forecast in Nowcast fell from -20.8% to -24.5%.
Leading US investment research firm NDR currently sees a 98% chance of a global recession, triggering a “severe” recession signal, the only other times the model has been this high during previous severe recessions such as 2020 In 2008 and 2008-2009, the current selling pressure on global equities continued to build. U.S. stocks sank deeper into a bear market on Monday, with the S&P 500 and Dow ending lower as investors worried that the Federal Reserve’s aggressive anti-inflation action could tip the U.S. economy into a deep recession.
Brown Brothers Harriman economists are bullish on the dollar against the backdrop of a generally risk-off environment and last week’s hawkish Federal Open Market Committee (FOMC) decision. Markets were already nervous last week as major central banks tightened monetary policy aggressively, but a massive misstep in Britain’s fiscal policy further added fuel to the fire.
Economists at the bank said the environment for risk assets remained challenging amid a marked slowdown in global economic growth. The bank expects the dollar to continue to strengthen in this environment, although expectations for Fed tightening remain high.
The euro bottomed out against the dollar this week, supported by a fall in the dollar.The hawkish tone of the European Central Bank supports the euro, but the political instability in Europe and fears of economic recession have always put downward pressure on the euro as a whole
Chart: EUR/USD daily chart trend
The ECB’s hawkish tone limited the euro’s downside.
European Central Bank policymakers said on Wednesday that they may need to raise interest rates by 75 basis points at their October meeting and again in December to levels that no longer stimulate the economy. The ECB has raised interest rates by a combined 125 basis points at its past two meetings, the fastest pace of policy tightening on record, but inflation may still take months to peak, suggesting the ECB will tighten monetary policy further. The ECB started raising rates much later than most of its peers.
Slovakia’s central bank governor Peter Kazimir told a news conference: “I have to say that 75 basis points is a good option to maintain the pace of tightening (our next step), but it is also necessary to wait for new data. We must remain aggressive, even ruthless, regardless of the impending recession.
Bank of Finland Governor Olli Rehn also said 75 basis points could be an option. Rehn said: “There are reasons to make another decision to raise interest rates significantly, maybe 75 or 50 basis points, maybe other moves. All the more reason for positive action and firm action. “But he did not elaborate on what the ‘other moves’ might mean.
Markets expect the ECB’s current deposit rate of 0.75% to rise to 2% by the end of this year and to around 3% next spring. Inflation is expected to remain above the ECB’s 2% target through 2024, and even longer-term expectations are above that target.
European Central Bank President Christine Lagarde said the “first target” of the rate-hike cycle would be “neutral” interest rates that neither stimulate nor slow economic growth. “We’re going to get inflation back to 2% in the medium term and we’re going to do what we have to do, which is to keep raising rates in the next few meetings,” she said at a meeting.
While neutral is a loosely defined concept, economists see it in the 1.5% to 2% range, which is where Rehn thinks it should be this year. Rehn said: “In my view, we will be heading towards neutral rate territory by Christmas. Once we get there, we’ll see if it’s necessary to go into restrictive territory.
Kazimir added that the 25-member governing board agreed that a “neutral” level had to be reached, but there was no consensus on what exactly that meant. The ECB may also have discussions on reducing its balance sheet this year as part of the normalization of monetary policy, but the discussions do not automatically imply that such action is imminent.
Political instability in Europe puts pressure on the euro.On September 26, local time, Italian right-wing alliance leader Meloni announced his victory in the parliamentary elections. At the same time, its main rival, the center-left party, the Democratic Party, announced its defeat. Many European media believe that Italy will have the most right-wing government since the end of World War II.
Previously, Meloni’s “anti-EU” and “anti-immigration” positions were more extreme. His “divisive” political identity label will not only lead to heated debates in Italy, but may also send a destructive voice to EU decision-makers. .
The conflict between Russia and Ukraine is still ongoing, many European countries are in an energy crisis and the inflation problem is getting worse. European countries will face enormous pressure if they continue to confront Russia. If Italy turns into another Hungary in a pinch, going against the EU, it will undoubtedly be a major blow to European unity. The victory of the Italian center-right party this time is as shocking to the EU as Brexit, and it will even accelerate the tearing of the EU! Once more right-wing forces in European countries come to power, the risk of EU dissolution will continue to escalate.
European Commission President von der Leyen has issued a warning to Italy a few days ago, suggesting that if Meloni and his fraternal party win the election, the EU will resort to punitive measures like Poland and Hungary.
Concerns about the economic situation in Europe also weighed on the euro.Data on September 23 showed that the initial PMI values of France, Germany, and the euro zone performed poorly in September as a whole, which reignited market concerns about the economic outlook of the euro zone. To make matters worse, the darkest moment of Europe’s energy crisis may not yet come, and the outlook is expected to get worse and worse.
High inflation + sharp economic slowdown or even shrinking, the euro area may have entered a stagflation cycle. Then, the European Central Bank’s continued interest rate hikes to curb inflation will not only greatly reduce the effect, but will also further deteriorate the economic situation.
As the euro zone economy continues to bleed and the EU faces the risk of being torn apart, the fate of the euro being continuously sold off by the market is unavoidable. Due to the increasingly severe political and economic situation inside and the suppression of the strong dollar outside, the prospect of the euro and the dollar will become more and more sluggish, and the possibility of falling to the low point after the establishment of the euro cannot be ruled out.
Morgan Stanley said in a report that it maintained bearish forecasts for the euro against the dollar, with a target level of 0.9300. The bank highlighted stagflation and geopolitical concerns as key catalysts to support its view.
The market hinted that the ECB’s terminal interest rate may rise by 3%, and the market had previously believed that the reasonable increase in the terminal interest rate was expected to be 2%. Morgan Stanley believes that the euro zone’s upcoming inflation data on Friday will be an extremely important reference, as investors need to measure the euro zone’s inflation outlook.
Sterling climbed volatile against the dollar this week, supported by the dollar’s retreat, and the Bank of England’s intervention in the market also supported the pound
Chart: GBP/USD daily chart trend
The Bank of England’s bailout temporarily relieved the upward pressure and sentiment on the yields of British, American and other global government bonds, and it can also be a means to prevent the dollar index from rising in stages.
The Bank of England issued a statement on the 28th that it would temporarily purchase long-term British government bonds “at any necessary scale” to restore market order, and British government bonds rose across the board. The Bank of England will purchase British government bonds with a remaining maturity of more than 20 years in the secondary market. The bond purchase period will last from September 28 to October 14. Once the risk of market operation is judged to have subsided, the Bank of England will be stable and stable. Exit bond purchases in an orderly manner. The Bank of England also emphasized that the quantitative tightening plan to reduce its holdings of British government bonds by 80 billion pounds per year remains unchanged, but the British government bond sales plan originally scheduled to start next week will be postponed to October 31.
The Bank of England’s temporary purchase of long-term “at any necessary scale” provides a floor for the British government bond market and is also self-endorsing the UK’s fiscal credit. The new British government announced large-scale fiscal stimulus measures on September 22. The British Debt Administration calculated that the net financing needs of the 2022-23 fiscal year will increase by 72.4 billion pounds to 234.1 billion pounds. government bonds to raise. The financial market has temporarily affirmed the heavy punch of the Bank of England. The yield of the 30-year government bond in the UK has recorded the largest decline after the Bank of England announced its bond purchase plan. In addition to the rise in short-term bond yields, bond yields of one year and above have also fallen. Both fell to varying degrees, with long-term bond yields falling by more than 10%. The market’s sell-off of sterling assets has been temporarily relieved.
On the other hand, the UK tax cut policy has caused market volatility and doubts. British Chancellor of the Exchequer Quasi Kwarten announced on September 23 the country’s largest tax cut in 50 years to boost the economy. On the 25th, Kwoten said that the government has planned to reduce the basic tax rate of personal income tax, and more relevant measures will be introduced in the future. This statement intensified market panic.
The International Monetary Fund (IMF) on the 27th publicly criticized the British tax cut policy, saying that the relevant policy may “intensify injustice” and increase the pressure on prices. A spokesman for the organization said in a statement that, given rising inflationary pressures in many countries, including the United Kingdom, a large-scale and untargeted fiscal plan is not recommended at this juncture, and fiscal policy cannot be at odds with the purpose of monetary policy.
Victoria Shorer, head of investment at UK-based Interactive Investments, said the government’s tax cuts were designed to support economic growth, but as the plan relies on a large amount of government debt and the current borrowing cost has risen sharply, investors are concerned that the government is considering fiscal prudence and sound monetary policy. not weeks. In addition, the policy does not take into account the negative impact of the current high inflation in the UK.
In response to external doubts, British Prime Minister Elizabeth Truss responded publicly for the first time on the 29th, saying that the recent fiscal plan is the right choice, and the British government must take decisive action to promote economic development and curb inflation. Truss said budget proposals were often accompanied by controversy, but the government needed to act fast to avoid an expected recession, was using a variety of tools to boost economic growth and was working closely with the Bank of England on fiscal planning.
But Suren Thiru, head of economics at the Institute of Chartered Accountants in England and Wales, believes the tax cuts are unlikely to deliver the significant economic growth the government expects and could instead fuel inflation and push up interest rates. A sharp fall in the pound and a surge in government borrowing costs underscores the importance of a solid fiscal plan, which is key to underpinning Britain’s economic outlook.
From April to July this year, the UK inflation rate hit a record high in 40 years. In August, the UK consumer price index rose 9.9% year-on-year, still at a 40-year high. In order to curb high inflation, the Bank of England announced on September 22 that it would raise the benchmark interest rate from 1.75% to 2.25%. This is the seventh time since December last year that the Bank of England has raised interest rates.