Actions subdued, dollar firm for central bank jamboree

SYDNEY: Stock markets slowed in Asia on Monday (September 19) as investors braced for a week littered with 13 central bank meetings that are sure to see rising borrowing costs across the world and a risk of rise in size in the United States.

Markets are already fully priced for a 75 basis point hike against the Federal Reserve, with futures showing an 18% chance of a full percentage point.

They also show that 50-50 odds rates could climb to 5.0-5.25% as the Fed is forced to tip the economy into recession to get inflation under control.

“To what level will the rate of funds ultimately have to rise? said Jan Hatzius, chief economist at Goldman Sachs.

“Our response is high enough to generate a tightening of financial conditions that puts a drag on activity sufficient to maintain a growth path well below potential.”

He expects the Fed to hike 75 basis points on Wednesday, followed by two half-point moves in November and December.

Also important will be Fed members’ rate forecasts, which are likely to be hawkish, putting the funds rate between 4 and 4.25% by the end of this year, and even higher next year.

This risk saw two-year Treasury yields jump 30 basis points last week to the highest since 2007 at 3.92%, making stocks more expensive by comparison and dragging the S&P 500 down by almost 5% for the week.

On Monday, the holidays in Japan and the UK got off to a slow start and S&P 500 futures rose 0.1%, while Nasdaq futures were flat.

EUROSTOXX 50 futures added 0.4%, while FTSE futures closed.

MSCI’s broadest index of Asia-Pacific stocks outside Japan fell 0.3%, after losing nearly 3% last week.

The Japanese Nikkei was closed, but futures implied an index of 27,400 from Friday’s close of 27,567.

China’s central bank went its own way and cut the repo rate by 10 basis points to support its struggling economy, leaving blue chips up 0.3%.

A PRESS TO TIGHTEN

BofA’s latest survey of fund managers suggests global equity allocations are at an all-time low.

“But with U.S. yields and the jobless rate heading toward 4-5%, bad sentiment isn’t enough to keep the S&P from hitting new lows for the year,” BofA analysts warned. in a note.

“Our suite of 38 proprietary growth indicators paints a bleak outlook for global growth, but we are witnessing one of the most aggressive tightening episodes in history, with 85% of global central banks in tightening mode.”

Most of the banks gathered this week – from Switzerland to South Africa – are expected to rise, with markets split on whether the Bank of England will go 50 or 75 basis points.

“The latest UK retail sales data confirms our view that the economy is already in recession,” said Jonathan Petersen, senior market economist at Capital Economics.

“So although the pound hit a new multi-decade low against the dollar this week, the relative strength of the US economy suggests to us that the pound will remain under pressure.”

The British pound was stuck at US$1.1436 after hitting a 37-year low of US$1.1351 last week,

One exception is the Bank of Japan, which has so far shown no sign of abandoning its ultra-loose yield curve policy despite the drastic fall in the yen.

The dollar edged higher to 143.08 yen on Monday, after falling from the recent 24-year high of 144.99 amid increasingly strident warnings of intervention from Japanese policymakers.

The euro was holding at US$1.1009, after rising slightly from its recent low of US$0.9865 on the back of increasingly hawkish comments from the European Central Bank.

Against a basket of currencies, the dollar was flat at 109.68, just off a two-decade high of 110.79 hit earlier this month.

The rise in the dollar and yields was a drag on gold, which was hovering at US$1,672 an ounce after hitting lows not seen since April 2020 last week.

Oil prices were trying to rebound on Monday, after losing about 20% so far this quarter amid concerns about demand as global growth slows.

Brent firmed 92 cents to US$92.27, while U.S. crude rose 76 cents to US$85.87 a barrel.

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