Please find below, a weekly market commentary received from Brooks Macdonald yesterday afternoon – 12/09/2022
- Central banks continue to dominate sentiment with the ECB raising rates by 75bps and bond markets expecting a similar move from the Fed
- Nord Stream 1’s closure has led to volatility in the European energy market however prices fell last week as investors positioned for government intervention
- The US CPI release on Tuesday will be a key input into the Fed’s interest rate policy decision next week
Central banks continue to dominate sentiment with the ECB raising rates by 75bps and bond markets expecting a similar move from the Fed
Central banks remained in focus last week as Federal Reserve (Fed) Chair Powell reinforced his hawkish message, saying that he was entirely focused on fighting inflation. These words impacted bond markets with a 75bp rate hike almost entirely priced in for the Fed’s September meeting. The European Central Bank (ECB) meanwhile raised interest rates by 75bps with President Lagarde noting that inflation was ‘far too high’ and that policy needed to tighten substantially. Despite this, equities performed well, mostly as prior trading weeks had come to terms with the reality that hawkish central bank rhetoric appears to be here to stay for the short term.
Nord Stream 1’s closure has led to volatility in the European energy market however prices fell last week as investors positioned for government intervention
With European energy markets still reacting to the closure of the Nord Stream 1 pipeline, EU energy ministers met on Friday to start forming a plan to help mitigate the energy price surge. Ministers pointed to a large range of tools that they could use to bring price levels under control. Markets were impressed by their fervour, driving European natural gas futures down over 6% on Friday. Over the weekend, the news that Ukrainian forces had successfully executed a counter offensive in the Northeast of Ukraine was welcomed by market participants. With Nord Steam 1 closed, the relative balance of power in the Ukraine War is arguably even more important for investors. Of course, progress by Ukrainian forces does risk a more aggressive escalation by Russia however equities have initially taken this positively.
The US CPI release on Tuesday will be a key input into the Fed’s interest rate policy decision next week
This week’s highlight is likely to be the US Consumer Price Index (CPI) report on Tuesday which will be front and centre of the Fed’s mind when they meet on 21st September. The market is expecting US Core CPI to actually increase year-on-year from 5.9% to 6.1% as housing costs continue to push up the core figures. By contrast, the fall in energy costs in recent months is expected to lead to a substantial fall in headline CPI with the annual rate moving from 8.5% to 8.1%. The month-on-month figure is expected to show a -0.1% decline, reflecting the sharp fall in US gas prices as well as global oil benchmarks.
Given the proximity of the Fed meeting, US central bank speakers are in the communication blackout window meaning that we will have little live reaction to the CPI print. That said, with investors very conscious of the sustained hawkish drumbeat of recent weeks, market pricing will quickly swing based on the CPI report.
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David Purcell
13th September 2022