Please see below, the weekly market commentary from Brooks Macdonald. Received yesterday afternoon – 31/10/2022.
Hopes for a US Federal Reserve (Fed) pivot gathered pace last week despite strong European inflation numbers
Markets continued their repricing of the bond market last week, preparing for a possible pivot of the Fed towards accommodative policy. The fresh attempt at a pivot narrative gained further traction as the Bank of Canada and European Central Bank (ECB) both sounded less hawkish at their latest meetings. By the end of the week however, European inflation readings, which came in far above expectations, poured some cold water on imminent hopes for a change in inflation momentum.
Russia has announced that it will end its grain deal with Ukraine, putting pressure on wheat prices
Over the weekend, Russia announced that it would be withdrawing from its agreement that allowed grain to leave Ukrainian Black Sea ports. Russia blamed this change in policy on a Ukrainian attack on ships within Crimea. The grain agreement was due to end in the middle of November however there was little expectation of a sudden termination in the agreement. Ukraine represents the fifth-largest exporter of wheat in the world so the end of the deal may lead to food shortages, particularly within poorer nations. Wheat prices rose earlier today as other agricultural commodities also rose as investors priced in the need to substitute wheat for other food supplies. The Brazilian election proved to be extremely tight with left wing leader Lula winning the election with 50.9% of the vote. The campaign proved to be highly divisive with Lula now needing to unite the country after allegations of possible voter fraud and corruption.
All eyes on the Federal Reserve with expectations of 75bps of interest rate hikes on Wednesday
Wednesday’s Fed decision will be the main macroeconomic event this week with the US central bank expected to raise interest rates by 75bps. The key question will be whether the Fed signals that it may slow the current pace of interest rate rises. With US interest rates some way below their expected terminal rate, interest rates are still likely to rise in subsequent meetings however if the pace was slowed to 50bp then 25bp hikes, this would take some pressure off the bond market.
Fed Chair Powell will be cautious of re-introducing granular forward guidance at this point given the uncertainties over both economic data and inflation. Indeed, before the December meeting, the market will need to absorb two US employment reports and two US Consumer Price Index (CPI) releases. Should Powell refer however to the fact that interest rate rises take some time to filter through to the economy, and suggest that it may soon be time to slow the pace of rate rises to see how the economy absorbs the recent hikes, this would be warmly welcomed by investors.
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Alex Kitteringham
1st November 2022