Please see below the weekly market commentary from Brooks Macdonald, covering the latest economic and markets news. Received late yesterday afternoon – 07/11/2022.
Last week saw hopes for a dovish US Federal Reserve peter out as Powell delivered a hawkish message
The start of last week saw hopes for a dovish US Federal Reserve (Fed) fizzle out with Chair Powell’s press conference eliminating hopes of an imminent Fed pivot, for the short term at least. Against that backdrop, bond yields rose with the US 2-year yield rising an outsized amount as the yield curve inverted further.
Thursday’s CPI inflation print will yet again set the tone for a market eager to see easing price pressure
The market will focus its attention on the US inflation report due on Thursday. Last month the upside beat to core Consumer Price Index (CPI) inflation rattled market sentiment with investors particularly concerned about the breadth of inflationary pressures. Core CPI is expected to ease slightly on a year-on-year basis, falling from 6.6% last month to 6.5%. Headline CPI remains highly volatile due to the large energy component of the reading and the market expects headline CPI to rise by 0.6% over the month, but for the year-on-year reading to fall from 8.2% to 8.1% due to base effects.
The US midterm elections are likely to end with a divided US government
The midterm elections take place tomorrow and will set the scene for the balance of political power over the next two years in the US. The latest polling suggests that Republicans are likely to take control of at least one element of Congress which will prevent the Democrats from passing any partisan legislation. The House of Representatives currently looks likely to move into Republican hands with the Senate a coin toss between the two parties. Whilst, optically, there has been political alignment between the US President, Senate and House of Representatives, all currently Democrat, the day-to-day reality has been far less united. Given the Democrat’s wafer-thin majority within the Senate, moderate Democrat Senators such as Joe Manchin have been hugely influential in watering down policies over the last two years. The Democrat party has been forced to use budget reconciliation bills to avoid the Senate filibuster and even then, with the pressure from Democrat moderates, the ambition of these bills has had to be constrained.
A divided government will mean that the President is limited, in practice, to executive powers and only using Congress for bipartisan measures. Budget bills could prove to be particularly contentious with Congress needing to decide how to deal with the US budget deficit. Should a split Congress threaten not to raise the US debt ceiling, this could catalyse a broad market concern over the US economy and US dollar.
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Alex Kitteringham
8th November 2022