Fed implements a fourth 75bps hike

• The US Federal Reserve’s FOMC hiked rates by a further 75bps last night for the fourth consecutive time, taking the upper bound to 4.00%, and cautioned that rate hikes still had ‘some ways to go’ given that there had been little meaningful impact on inflation so far. As such, the terminal rate would likely be higher than had been previously anticipated – markets imply at least 5.00% – even as the bank’s statement acknowledged the lag with which monetary tightening impacted economic and inflation data. Chair Jerome Powell did intimate that the pace of tightening could slow soon, saying that it ‘may come as soon as the next meeting, or the one after that’, but markets nevertheless took the commentary poorly, with the benchmark US equity indices falling sharply. The UAE and Saudi Arabian central banks have also hiked by 75bps.
• Underlining the challenge facing the Fed, there was further strong labour market data released yesterday in the form of the ADP report, which surprised to the upside as it added 239,000 jobs. Consensus projections had been for 185,000, while the previous month saw 192,000. This followed on from the surprise jump higher in the JOLTS job openings reported earlier this week, and all eyes will now be on Friday’s NFP report for any indication of a slowdown in the labour market there.
• Following an earlier announcement by Turkey, Russia confirmed yesterday afternoon that it would resume the export deal for Black Sea grain after Ukraine pledged to use the corridor solely for grain. Wheat prices, which had risen at the start of the week after Russia announced its leaving the deal over the weekend, subsided once more.
• The S&P Global manufacturing PMI for the Eurozone was revised down further into contractionary territory on the final reading, slipping from the initial flash estimate of 46.6 to 46.4. France and Germany, the bloc’s two largest economies, saw even larger contractions in their manufacturing sectors, while with new orders declining at one of the fastest paces in the series history, the outlook for the coming months appears bleak.

Today’s Economic Data and Events

• 11:00 Turkey CPI inflation, October, % y/y. Forecast: 85.6%
• 14:00 Eurozone unemployment rate, September. Forecast: 6.6%
• 16:00 UK Bank of England rate decision. Forecast: 3.00%
• 16:30 US initial jobless claims, week to October 29. Forecast: 220,000

Fixed Income

• Treasuries oscillated sharply on the latest 75bps hike from the Federal Reserve. The Fed seems prepared to slow the pace of rate hikes from the December meeting but Fed chair Jerome Powell noted that rates “have a ways to go” before they got to a level that was “sufficiently restrictive.” Markets took those comments as very hawkish and reversed quickly with the 2yr UST yield ended the day up 6bps at 4.5447% after having fallen below 4.45% at one point. The 10yr UST showed similar moves, dipping to 3.9677% in the immediate aftermath of the Fed before recovering to 4.0419% on the close, essentially unchanged on the day.
• Markets are leaning toward a 50bps hike at the December FOMC meeting, in line with our own expectations. However, another 50bps looks to be priced in for February as well with the peak in the Fed funds rate at more than 5% next year.
• Markets will now be looking to the Bank of England and what scale of hike it will provide after the political and fiscal dislocations of the last few weeks. Market pricing is for a 70bps hike to take the Bank Rate to 3%.

FX

• Currency markets will be enduring some whiplash after the rapid moves in the wake of the FOMC. EURUSD initially spiked up to 0.9976 before plunging on Powell’s commentary to close the day down 0.6% at 0.9818. GBPUSD showed similar moves, rising to 1.1564 before sinking and closing the day down 0.8% at 1.1392. USDJPY, however, moved in favour of the yen, closing down 0.25% at 147.90.

Equities

• The FOMC decision weighed heavily on US equities yesterday, with all three major benchmark indices taking a leg lower. The growth sensitive NASDAQ was the biggest loser as it dropped -3.4% but the S&P 500 (-2.5%) and the Dow Jones (-1.6%) also fell.
• In Europe, the FTSE 100 and the DAX both dropped -0.6% while the CAC fell -0.8%.
• Locally, the ADX added 0.2% and the DFM 0.7%.

Commodities

• Oil prices settled higher as anxiety over security of supply remains high even while demand will take another knock from further hikes in interest rates from the Federal Reserve. Brent futures closed at USD 96.16/b, a gain of 1.6% while WTI added 1.8% to close at USD 90.00/b.
• Crude inventories in the US dropped by 3.1m bbl last week while the SPR release slowed to less than 2m bbl. US oil production fell by 100k b/d to 11.9m b/d last week. 

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