Markets Are Burning.. The Strength of the Dollar, Bonds and Interest Pricing Confuses Everyone By Investing.com


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Investing.com – Stocks, flames and oil escaped the dollar hammer and the bond anvil during trading last week, even as oil joined the rally of advancers, but fears of dollar bullying and Fed surprises still cast a gloomy shadow over the markets.

Things are getting heated up and uncertainty is deepening, as US interest rates are expected to reach 5% next year as policy makers puzzle over entrenched inflation.

Markets were shaken by the sudden resignation of UK Prime Minister Liz Truss and her departure from office as a result of the backlash over the mini-budget that has put the UK economy under the microscope before the whole world.

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While the bleak retail sales data and persistently high inflation readings in the UK boost the odds of a 75bp rate hike by the Bank of England to 80%.

On the other hand, the American reached the level of 113 points, with the Japanese yen declining around the barrier of 150 points for the first time since August 1990.

Reserve the dollar and release bonds

Last week witnessed the release of a limited number of economic data in the United States, but the dollar maintained its lead on the list of major currencies, with returns rising to their highest levels since the beginning of this year.

The US 10-year Treasury yield reached its highest level since the beginning of the year at 4.15% as market participants continue to price the Fed’s hawkish moves.

interest pricing

The market is currently pricing the Federal Reserve interest rate at 5.00% next year after raising it twice by 75 basis points by the end of this year, which were fully priced.

Chicago Fed President Charles Evans also highlighted the current dilemma facing the Fed and other major central banks that avoiding deflation is becoming a more imminent problem than usual.

He also stressed that he still hopes that raising the interest rate to its highest levels, ranging between 4.50% to 5.00%, will be sufficient to reduce inflation rates again towards the target level.

housing market

On the data front, home construction and new building permits decreased in the US in September, adding to indications that rising mortgage rates to their highest levels in two decades are negatively impacting demand and discouraging building and construction activities.

However, despite this, this is unlikely to affect the decisions of Federal Reserve officials who have not yet seen clear evidence in the US economy confirming price moderation after the latest CPI readings exceeded all estimates.

yen fall

On the other hand, the greenback continued to rise against the other major currencies, and with bond yields rising, the dollar continued to gain against the Japanese yen.

The Japanese currency pair touched 150.00 for the first time since August 1990 and reached its highest level at 151.94.

The US dollar gained against the Japanese yen for 12 consecutive trading sessions, before the Bank of Japan intervened late on Friday.

sterling is falling

Continuous rise in food prices contributes to boosting inflation rates in general, and in the United Kingdom, the consumer price index rose again to double-digit rates in September to 10.1% compared to 9.9% in August, thus recording its highest level in 40 years, which it reached in July Past.

Food was the main driver of the rise in the consumer price index, compared to August, after recording a growth of 0.16%, and the inflation rate of food and beverage prices is now 14.5% on an annual basis compared to 13.1% in August.

Retail sales fell 1.4% m/m in September versus market consensus expectations of -0.5%. Expectations of a 75bp rate hike by the Bank of England at its next meeting scheduled for 3rd November are also 80%.

Meanwhile, the pound continued to fluctuate at a sharp pace, as it rose to the level of 1.1439 on Monday, but it continued to decline as political uncertainty escalated throughout the week.

High inflation data and weak retail sales dragged the British Pound back below the 1.11 level.

Liz’s resignation

British Prime Minister Liz Truss resigned last Thursday, making her the shortest term as prime minister in the country’s history.

Teras will remain in her position until a successor is chosen to take over the leadership of the party and the government, a procedure that she said will end within a week.

The United Kingdom has experienced political turmoil since the June 2016 referendum to leave the European Union, but the past few weeks have been exceptional even by those standards.

Boris Johnson and his former finance minister, Rishi Sunak, were the front-runners to replace British Prime Minister Liz Terrace on Friday, rallying supporters for one of them to take over the leadership of the Conservative Party in a heated contest.

To qualify for the premiership, the candidate must collect 100 votes from conservative lawmakers by next Monday to compete in the competition that the party hopes will strengthen its position out of the problems it is experiencing.

Japan is interfering

Japan’s inflation reading in September reached an eight-year high of 3.0% y/y.

These data pose great challenges to the central bank’s insistence on maintaining its accommodative policies, as the Japanese yen continues to decline to its lowest recorded level in 32 years, which contributes to raising import costs.

The inflation data highlights the dilemma the Bank of Japan is facing as it tries to support the weak economy by keeping interest rates at very low levels, which in turn leads to a weaker Japanese yen.

Japanese Finance Minister Shunichi Suzuki said on Friday that authorities were treating speculators “firmly”, as the massive selling of the Japanese yen kept markets on high alert for the government to continue its intervention and sell dollars.

Suzuki said at a press conference held regularly in response to a question if the Japanese yen is under attack from speculators We are strictly against speculators, and will respond appropriately while monitoring currency market movements with urgency.

Before closing the trading session on Friday, the Bank of Japan intervened in the market and pushed the USDJPY currency pair to the 147 level.

Fed excited

“Fighting inflation with higher rates was a good thing,” Chicago Fed President Charles Evans said at a bankers’ seminar hosted by the bank in Chicago on Friday, reminding the audience that interest rates were as low as near zero last March.

San Francisco Federal Reserve Bank President Mary Daly emphasized Friday that the central bank should start planning to reduce the intensity of interest rate hikes, even though it is not yet time to “stop” the big hikes.

On the possibility of officials raising interest rates by 75 basis points at the November meeting, she said, “I would recommend people not to consider this as difficult, because it will not be 75 points forever.”

What’s Next?

A shift toward a slower rate hike, such as its 50 basis point hike in December, could give them scope to continue raising rates next year if inflation does not slow as it is, said Derek Tang, an economist at LH Meyer in Washington. is expected.

They can thus avoid the risk of raising rates at higher rates than they would like, which is a useful strategy, because officials’ expectations reveal reluctance to cut rates next year.

Monetary policy makers may face a challenge to communicate with investors and their misinterpretation of the slow pace of rate hikes, the recovery of stock markets and the easing of credit restrictions, said Kathy Bostancik, chief US economist at Oxford Economics.

Matthew Luzzetti, chief US economist at Deutsche Bank (ETR:) Securities, said that even if officials slowed the pace of rate hikes to 50 basis points in December, their post-meeting summary of economic expectations could send a hawkish signal that they are ready to raise rates. interest rates.

Luzzetti added that the size of the interest rate hike in December and any change in their announced expectations depend on what happens to the economy before then, as officials need to absorb a large number of economic reports before the last monetary policy meeting of this year.

“Until those indicators come out in the economic data, I think it’s hard to be pretty convinced that they’ve done enough in terms of peaking interest rates,” Luzzetti said.

what happened?

US stock indices rose at the end of last Friday’s trading session, with the continued release of corporate business results and an assessment of the monetary policy path.

Wall Street’s gains came as US Treasury yields fell from their high levels recorded on Friday, as the 10-year bond yield fell to 4.21%, after exceeding 4.3% earlier in trading.

stock

The industrial index rose by 2.5%, or 749 points, at 31,082 thousand points, to rise by 4.9% in the total trading of this week.

The “S&P 500” rose by about 2.4%, or 87 points, to record 3752 points, to achieve a weekly gain of 4.7%, and the “Nasdaq” index witnessed a rise by 2.3%, equivalent to 245 points, to reach 10,859 thousand points, to rise by 5.2% this week.

December delivery rose 1.2%, or $19.50, to $1,656.30 an ounce at the end of trading last Friday.

And gold rose by about 0.5% in the total trading this week.

Gold received some support, after some Federal Reserve officials said they were concerned about monetary policy tightening more than supposed, after raising rates by 300 basis points since last March.

oil

It rose upon settlement of Friday’s trading, with cautious optimism about a recovery in crude demand and an assessment of supply concerns.

The futures contracts for the benchmark crude for December delivery rose by 1.2%, or the equivalent of $1.12, to reach $93.50 a barrel upon settlement, to record a weekly gain of about 2%.

And the price of West Texas crude for December delivery rose by about 0.6%, or 54 cents, at $85.05 a barrel, to rise by 0.5% in the total this week.

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