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Investing.com – These are tough times for the global economy, especially following a slew of data and decisions turned the landscape upside down during a fierce week from all directions.
US Federal Reserve officials are defying expectations for a rate cut next year following the release of mixed economic data while the Reserve Bank of Australia is slowing the pace of rate hikes.
And at a time when Europe is heading towards recession in light of slowing economic activity and skyrocketing inflation, the European Central is preparing to raise interest rates by 75 basis points at its next meeting.
The UK is backing away from plans for massive unfunded tax cuts following strong reactions from Britain and its global peers.
A rise in the price of the US dollar in conjunction with the fragile market sentiment accompanied by the rapid rise in borrowing costs, which might lead to a deeper global economic downturn, escalation of the conflict between Russia and Ukraine, and the tightening measures taken by the Federal Reserve.
OPEC and its allies announce a production cut of 2 million barrels per day, which is the largest cut in production quotas since 2020 as part of its efforts to support oil prices above $90 a barrel.
Economic turmoil
Concerns regarding economic growth escalated as the Federal Reserve continued to raise interest rates to curb inflation, and the US manufacturing sector index fell in September to 50.9, from its lowest level in the past two years following orders contracted for the third time in four months. The new orders index fell to 47.1, which is also the lowest level since the first months of the pandemic, indicating a decline in demand, and at the same time, the growth rates of American service providers stabilized in September, reflecting the strength of business activity and increasing orders, while the price scale fell to the lowest levels since the beginning of 2021.
These data indicate that the demand for services remains strong despite the increase in inflation rates, high interest rates and growing concerns regarding the prospects for economic growth. The tightening of labor market conditions is one of the main factors that enhance this demand, in light of the increase in jobs and the drop in unemployment rates to their lowest levels in history.
However, it should be noted that wage growth rates, despite their slower pace of growth compared to inflation, are still very high, and the labor market continues to show signs of strength and flexibility, perhaps more than the Federal Reserve would like, despite the slow pace of creating opportunities new work.
The index of vacancies and the rate of work turnover revealed that job opportunities decreased by 10.1 million jobs last August, which is the lowest level recorded since June 2021. However, despite this, it is still very high.
The number of non-farm payrolls in the private sector rose by 208 thousand in September, beating expectations and higher than last month’s growth rate of 185,000.
Total non-farm payrolls increased by 263,000 jobs in September as well, at a faster pace than expected in September, while the unemployment rate fell from 3.7% to 3.5%, and the rate of wage growth remained strong, rising by 0.3% m/m (5% yoy). annual basis), indicating strong demand for labor in light of rising borrowing costs and tightening financial conditions.
Federal mission
While the markets expected a rate cut by the end of next year following the release of mixed economic data, Federal Reserve officials stuck to their position and emphasized continuing to raise interest rates, noting that they will remain high.
Mary Daly, President of the Federal Reserve in San Francisco, and Rafael Bostick, President of the Federal Reserve in Atlanta, were the last to join the call for continued monetary tightening to control inflation. general.
dollar bias
The Fed’s policies have turned the US dollar into a destructive force and there is no sign of an end in sight, and it is clear that the market has sided with the dollar, which is considered one of the best safe havens in light of the increasing uncertainty.
The hard-line calls of Federal Reserve officials contributed to the rise in yields and the rise of the dollar, and the American ended the week’s trading at the level of 112.747.
the fragile
The European Central Bank has had to deal with rising inflation with the growing energy crisis and the weakening of the euro as a result of the spillover effects of the tight monetary policies applied by the United States.
The minutes of the last ECB meeting in September revealed that some policy makers favored a 50bp lower rate hike despite finally agreeing to a 75bp move.
The statement clarified the Board’s concern that inflation rates would be entrenched at exceptionally high levels and that a lower euro might add to inflationary pressures. Therefore, there was a need to tighten monetary policies at a sharper pace, even if this negatively affected growth.
The minutes of the meeting included that the expected weakness in economic activity will not be sufficient to reduce inflation to a large extent and will not, by itself, return the expected inflation to the target level.
Although there is no agreement indicating a similar rate hike in future meetings, policy makers have already expressed their willingness to raise the interest rate by another 75 basis points to the deposit rate to 0.75% at the meeting scheduled for later this month. .
The euro is still below parity with the US dollar even following the minutes of the last European Central Bank meeting indicated that more strict monetary policies will be applied in the future, and the euro ended the week’s trading at 0.9745.
Mess
After severe market turmoil and mounting criticism from within Britain and around the world, the UK government reversed its plan to scrap the tax cut on income over 150,000 pounds ($166,770) from 45% to 40%.
The chaos caused by the unfunded tax cut plan wiped out billions of pounds from British financial markets, forced the Bank of England to intervene to prevent the bond market crash, and the pound fell to an unprecedented level once morest the US dollar.
Treasury Secretary Kwasi Quarting is set to announce his medium-term fiscal plan to calm financial markets regarding his economic strategy.
“The announcement will outline how we plan to reduce debt as a percentage of GDP over the medium term,” Prime Minister Liz Truss said, adding that our focus is now on building an economy with high growth that funds basic public services, raises salaries and creates opportunities across the country.
The British pound has seen a flurry of fluctuations lately, and has been falling despite a sharp rise in bond yields, usually a sign that markets are concerned regarding the credibility of policies.
In addition, the risks of a slowdown in the growth of this large economy next year in light of the inflation rate reaching its highest levels and recording the largest current account deficit, factors that had a negative impact in particular on the pound sterling, which ended the week’s trading at 1.1088.
brink of stagnation
Economic activity in Europe has been affected by the skyrocketing energy prices that continue to perpetuate high inflation rates. During August, producer prices in the Eurozone jumped 5% m/m (43.3% y/y) in the biggest rise since March.
While core prices excluding energy increased 0.3% (14.5% y/y), retail sales fell 0.3% m/m (2% y/y), indicating consumer demand was hit by the energy shock from the Russia-Ukraine war and confirming expectations of a recession. imminent.
Economic prospects in the region are also taking darker trends, which has led to demand faltering in the face of rising inflation and overburdening economic activity in Europe’s largest economy, as Germany’s manufacturing sector lost further momentum in August with factory orders and industrial production reaching levels below expectations once more.
Factory orders fell 2.4% month-on-month, and industrial production fell 0.8% due to continued supply bottlenecks, and higher energy costs pushed import prices to grow by 4.3% in August, the highest levels recorded since 1974, and retail sales fell by 1.3%.
The yen is above the red line
It ended the week’s trading above the red line at 145, reaching 145.33, and Japanese Finance Minister Shunichi Suzuki stated that the government is ready to intervene in the currency markets to prevent deeper losses for the local currency.
Confidence in Japanese business has remained fragile for three consecutive quarters in the wake of the rapid decline of the Japanese yen and deteriorating prospects for global economic growth, with the Tankan manufacturing survey reading down to 8 last month while expectations pointed to an index of 11.
The performance of the services sector was better, rising to 14 last month, as no change was expected due to the reopening of the country to tourism and its impact on improving the sector’s morale.
The pace of inflation in Tokyo accelerated for the fourth consecutive month to 2.8% on the back of rising food and commodity prices, which exacerbates the challenges faced by the Bank of Japan to express its desire to continue the accommodative policies that support inflation.
Tokyo data is a leading indicator of inflation at the country level, and if growth rates are similar for the country in general, the inflation rate may reach 3% in the coming months.
On the other hand, the latest wage data indicated that salary growth still lacked the strength to push Bank of Japan Governor Haruhiko Kuroda to reverse his policies, and inflation-adjusted real wages fell by 1.7% in August compared to the previous year.
Although the inflation rate has exceeded the BOJ target of 2% for four consecutive months and is not limited to energy prices only, Governor Kuroda reiterated the need to continue monetary easing as he believes that the current inflation that drives increased costs is unsustainable and that price growth will decline to less than 2% next year on the back of slow wage growth.
Surprise
The decision of the Reserve Bank of Australia to slow the pace of policy tightening, along with other macroeconomic factors that supported the US dollar affected the Australian dollar, which ended the week’s trading at 0.6368.
The Reserve Bank of Australia launched a surprise easing by raising interest rates by just 25 basis points, ending a series of massive 50 basis point increases.
The Reserve Bank of Australia has raised interest rates by 2.25 percentage points since May of this year, keeping the cash rate at a record low of 0.1%.
Governor Philip Lowe confirmed adherence to monetary tightening even as he acted on signs that he would do so at a slower pace.
Lowe said in his statement that the liquidity ratio has been increased significantly in a short period of time, and the board will remain committed to its determination to return inflation to the target level and will make every effort to achieve it.
The inflation rate had accelerated to 6.1% in the second quarter of the year, with expectations that it would peak at nearly 8% later this year before slowing down in 2023.
Australian policy makers recognize that the country’s household sector is among the most creditor in the world and that the nature of the variable rates on mortgages means the increased impact and effectiveness of interest rate hikes in particular.
Today, Lowe said the Board expects interest rates to increase further over the coming period, as we closely monitor the global economy, consumer spending, and behavior that determines wages and prices.
So far, debt-burdened households in Australia have shown resilience in the face of higher rates. Job advertisements remain high and retail sales grew 0.6% in August, rising for the ninth consecutive month.
Oil and OPEC
Oil prices maintained gains following OPEC and its allies approved the largest production cut plan since 2020 and Russia warned that capping oil prices might lead to a drop in domestic production.
The coalition agreed to cut production by two million barrels per day in an attempt to revive plunging prices and defend the oil industries and their economies from the risks of a global slowdown.
The risks to the growth of oil demand tend to be negative in light of the economies facing a tighter monetary policy, high inflation rates, and a slowdown in economic activity. In addition to the positive outlook, China issued new quotas for fuel imports and exports to boost its economy.
West Texas Intermediate crude ended the week’s trading at $92.92 a barrel, while the week’s trading mix ended at $103.05 a barrel.
under pressure
On the other hand, gold declined following being negatively affected by the change of views on the position of the Federal Reserve and the rise of the dollar.
It rose nearly 4% in the first two trading sessions of the week amid disappointing US data, but fell following new data revealed that the US economy remains resilient.
As the Federal Reserve continued to tighten its policies, gold ended the week’s trading at $1,694.53 an ounce.
