Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 13/09/22
August’s red hot US inflation report suggests that the Federal Reserve will continue to raise interest rates aggressively
Key Takeaways
Government bond interest rates rose in the past week on both sides of the Atlantic, in view of hawkish central banks. Recall that recent Fed officials’ commentary has contributed to the prospect of another hike in the federal funds rate by 75 bps to a range of 3.0% - 3.25% on September 21st.
The solid core CPI reading for August was a notable surprise (+0.6% mom vs expectations of +0.3% mom) implying that the Fed would not shift down the pace of tightening. The core CPI rose by 6.3% yoy from +5.9% yoy in July and the headline CPI increased by +8.3% yoy from +8.5% yoy.
As a result, the US 2-Year Treasury yield surged intraday by circa 25 basis points to 3.75% and the 10-Year rose by 15 basis points to 3.45%, with the 10/2s curve inverted further. Front-end German interest rates have increased by 20 basis points to 1.3% in the past week (10-Year up by 18 basis points to 1.68%) as the ECB now favors front-loading interest rate hikes.
The ECB increased its key policy rates by 75 basis points to +0.75% (DFR), +1.25% (MRO) and +1.50% (MLF). President Lagarde noted that further hikes should be expected at the next several meetings, which she specified as probably more than two and less than five. Interest rates are far from the level the ECB thinks appropriate to help return inflation to 2%.
The pace of central bank normalization remains top of mind for investors. Following the stronger-than-expected CPI outcome on Tuesday, the S&P500 index was down by 3%. In the past week, equity markets have moved higher mostly on the back of positive data surprises (US ISM) and some respite for wholesale prices of natural gas and electricity in Europe (c. -40% & -50%, respectively as of September 12th from their peak on August 26th).
The European response to the energy crisis continues to be formed. Reportedly, a twofold approach is discussed in the EU. First, reducing power demand is a major goal, with a broad target for overall consumption and a mandatory one for electricity usage during peak hours (when the expensive natural gas is needed to come into the wholesale market for total demand to be met).
The second part of the approach entails: i) oil, gas, coal and refinery companies facing an “exceptional and temporary” levy on their extra-ordinary profits (likely to be calculated on the basis of the extent that their pre-tax profits will exceed the average in 2019 – 2021) for relief measures towards households and companies to be funded and; ii) a limit in excess revenues (via a price cap) of power producers which rely on renewables, lignite and nuclear sources.
In the United Kingdom, the new PM Mrs. Truss, pre-announced a sizable fiscal intervention (initial estimates suggest that the package may amount to c. £150 bn or 6% of GDP) to alleviate the burden from skyrocketing energy bills.
The plan entails support measures for companies for the next 6 months (details are yet to be finalized) and a cap for households’ bills as of October 2022 and for the next 2 years. In the event, for an energy consumption equaling the median one per household in 2019, the bills will be capped at £2.500 per annum, instead of £3.550 as estimated without government intervention (calculations are based on a weighted average base for all types of dwellings).
Key Takeaways
Government bond interest rates rose in the past week on both sides of the Atlantic, in view of hawkish central banks. Recall that recent Fed officials’ commentary has contributed to the prospect of another hike in the federal funds rate by 75 bps to a range of 3.0% - 3.25% on September 21st.
The solid core CPI reading for August was a notable surprise (+0.6% mom vs expectations of +0.3% mom) implying that the Fed would not shift down the pace of tightening. The core CPI rose by 6.3% yoy from +5.9% yoy in July and the headline CPI increased by +8.3% yoy from +8.5% yoy.
As a result, the US 2-Year Treasury yield surged intraday by circa 25 basis points to 3.75% and the 10-Year rose by 15 basis points to 3.45%, with the 10/2s curve inverted further. Front-end German interest rates have increased by 20 basis points to 1.3% in the past week (10-Year up by 18 basis points to 1.68%) as the ECB now favors front-loading interest rate hikes.
The ECB increased its key policy rates by 75 basis points to +0.75% (DFR), +1.25% (MRO) and +1.50% (MLF). President Lagarde noted that further hikes should be expected at the next several meetings, which she specified as probably more than two and less than five. Interest rates are far from the level the ECB thinks appropriate to help return inflation to 2%.
The pace of central bank normalization remains top of mind for investors. Following the stronger-than-expected CPI outcome on Tuesday, the S&P500 index was down by 3%. In the past week, equity markets have moved higher mostly on the back of positive data surprises (US ISM) and some respite for wholesale prices of natural gas and electricity in Europe (c. -40% & -50%, respectively as of September 12th from their peak on August 26th).
The European response to the energy crisis continues to be formed. Reportedly, a twofold approach is discussed in the EU. First, reducing power demand is a major goal, with a broad target for overall consumption and a mandatory one for electricity usage during peak hours (when the expensive natural gas is needed to come into the wholesale market for total demand to be met).
The second part of the approach entails: i) oil, gas, coal and refinery companies facing an “exceptional and temporary” levy on their extra-ordinary profits (likely to be calculated on the basis of the extent that their pre-tax profits will exceed the average in 2019 – 2021) for relief measures towards households and companies to be funded and; ii) a limit in excess revenues (via a price cap) of power producers which rely on renewables, lignite and nuclear sources.
In the United Kingdom, the new PM Mrs. Truss, pre-announced a sizable fiscal intervention (initial estimates suggest that the package may amount to c. £150 bn or 6% of GDP) to alleviate the burden from skyrocketing energy bills.
The plan entails support measures for companies for the next 6 months (details are yet to be finalized) and a cap for households’ bills as of October 2022 and for the next 2 years. In the event, for an energy consumption equaling the median one per household in 2019, the bills will be capped at £2.500 per annum, instead of £3.550 as estimated without government intervention (calculations are based on a weighted average base for all types of dwellings).