- Will inflation kill the corporate cash cow?
- Britain’s policy confusion
- The ECB ready to go into high gear
- The crypto hacking compromise
- Key data for the coming week
- Key corporate earnings for the coming week
Stoxx 600 2.45% QTD and 18.46% YTD
DAX 5.18% QTD and 19.79% YTD
CAC 40 4.83% QTD and 15.55% YTD
IBEX35 2.94% QTD and 12.97% YTD
FTSE MIB 4.07% QTD and 21.42% YTD
FTSE 100 0.45% QTD and 6.22% YTD
Note: As of 5 pm EDT 19 October 2022
The Fed target rate continues to climb. The Fed is, based on a still tight labour market with unemployment falling to 3.5% in September and Core CPI rising to 6.6% year-on-year in September, extremely likely to raise rates at least another 75bps at its 1-2 November meeting in an effort to dampen demand and rein in inflation. However, markets remain wary that the scale of global rate rises will push economies in Europe, and possibly the US as well, into recession. Federal Reserve Bank of St Louis President James Bullard said on Wednesday that he expects the Fed to end its ‘’front-loading” of higher interest-rate hikes by early next year but that policy will remain restrictive. This is in line with other Fed policymakers such as Fed Bank of Minneapolis President Neel Kashkari who said on Tuesday that the Fed may need to push its benchmark policy rate into more restrictive territory if inflation continues to rise.The Fed target rate in September was 4.5-4.75% but, given the stickiness of inflation, there is a growing consensus that it will rise to at least 4.75-5% as traders are starting to price in a 75 bps rise in December as well.
The USD continues to rise: it’s up over 17% YTD against the GBP, almost 14% YTD against the EUR, and is over 30% against the YEN. On Thursday the Yen touched a 32-year low against the USD, breaching the ¥150 level. This led to Japanese Finance Minister Shunichi Suzuki to say that he will "take decisive action" against excessive, sharp Yen moves. This intervention threat will make next week’s Bank of Japan (BoJ) meeting more difficult in terms of maintaining the ultra-low interest rates that are blamed for pushing down the Yen vs other global currencies.
This week saw investors reacting to a strong start to the corporate reporting season, with financial stocks including JP Morgan Chase & Company, Bank of America, Huntington Bancshares Inc., BlackRock and Wells Fargo all .
However, as the week progressed, it has become more apparent that higher energy and labour costs, and even the strength of the US dollar, are hitting corporations’ margins and are likely to do so for the foreseeable future as persistent inflation, rising rates, declining growth estimates, and increasing financial stress creates more volatility and uncertainty. This has negatively affected stocks like the Kroger Company, Tesla, Wynn Resorts, Las Vegas Sands Corp, Fox Corporation and Abbott Laboratories this week.
Concerns around the continuing energy shortage and the OPEC+ decision this past Sunday to endorse production cuts helped energy stocks trend including Exxon Mobil, Chevron Corporation, Occidental Petroleum, Devon Energy Corporation, Baker Hughes, and Halliburton.
The UK’s policy turnaround. The new Chancellor of the Exchequer, Jeremy Hunt reversed virtually all of the tax changes in the government’s September “mini-budget” with the only tax changes kept being the £13 bn cut in National Insurance and a cut to stamp duty. In an attempt to calm market concerns over the adequacy of government policy, he has also said that the government would establish an economic advisory panel to provide expert advice. Meanwhile the Bank of England (BoE) ended its emergency bond purchases last Friday, buying £1.45 billion of long-dated and inflation-linked gilts. It is now expected to go ahead with the sale of government bonds from 1 November. According to Bloomberg, the UK Treasury is set to transfer more than £11 billion to the BoE this fiscal year to cover projected losses in its bond-buying programme.
The BoE is expected to raise rates again in November following the biggest jump in food prices since 1980 which pushed British headline inflation to 10.1% in September, up from 9.9% in August. However, a depreciating Pound Sterling has raised fears of a deeper recession and may make for a less aggressive rate hike by the BoE in November. BoE Deputy Governor Ben Broadbent said on Thursday that it’s not clear if UK interest rates need to rise as much as investors expect despite the justification for tighter policy being clear. He warned that if rates follow the current path, it could cause a 5% hit to GDP. This has caused markets to rethink the 100 bps rise it had pencilled in, with traders now focusing on a 75 bps rise.
The ECB is now chasing the Fed. It is widely expected that the ECB will take aggressive action during its next meeting on 27 October. With Eurozone headline inflation hitting a record high10% in September and showing no real signs of peaking as household and business’ energy contracts are renegotiated and food prices continue to rise following on from the Summer’s drought, and even core inflation, i.e., excluding food and fuel prices, up 6.1% from 5.5% in August, the ECB is looking increasingly likely to next raise rates by 75 bps. According to Refinitiv data, markets now see the 0.75% deposit rate rising to around 2% by the end of this year, hitting 3% in the Spring before starting to stabilise. Eurozone countries have been stocking up their energy supplies in anticipation of potential energy shortfalls this winter, but have still not come to any agreement on EU wide price caps.
Stolen crypto funds to be returned. Mango Markets, the decentralised crypto exchange (DEX), said it would start returning the $114 million of funds stolen by hackers on 11 October. Following the hacking incident, the Mango Markets community decided to make a deal with the hackers by allowing them to keep $47 million as a bounty. Daffy Durairaj, Mango Labs co-founder, said in a tweet on 20 October that “the programme for depositors to recover funds is in audit and should be ready to go by tomorrow morning.” One of the hackers came forward and said that the hacking team had returned $67 million. Avraham Eisenberg tweeted on Saturday “I was involved with a team that operated a highly profitable trading strategy last week.”
According to Chainanalysis Inc., hackers have taken over $3 billion this year. This has prompted Crypto billionaire Sam Bankman-Fried to create a framework for limiting the impact of these hacks including capping the maximum bounty for attackers at $5 million. In a FTX Policy blogpost he called a “5-5 standard” where hackers keep either 5% of the amount they’ve taken from a protocol or $5 million, whichever is smaller. A critical proviso is that the hacker is acting in “good faith” and fully intended to cooperate and return most of the assets and that “there is no negotiating, or holding out and trying to use this framework as a backup plan.” It’s not clear yet whether the rest of the crypto community fully supports this suggestion.
Key data to look out for this coming week
Friday: EU leaders summit and Eurozone Consumer Confidence survey.
Saturday: A speech by ECB President Christine Lagarde.
Monday: French S&P Global Composite, Manufacturing, and Services PMIs, German S&P/BME Global Composite, Manufacturing, and Services PMIs, Eurozone S&P Global Composite, Manufacturing and Services PMIs.
Tuesday: Eurozone ECB Bank Lending Survey, German IfO Business Climate, Current Assessment, and Expectations surveys.
Thursday: German GfK Consumer Confidence survey, Spanish unemployment, ECB Monetary Policy decision.
Friday: Retail sales data
Monday: S&P Global/CIPS Composite, Manufacturing, and Services PMIs.
In the US:
Friday: A speech by Fed Bank of New York President John Williams.
Monday: Chicago Fed National Activity Index, S&P Global Composite, Manufacturing and Services PMIs.
Tuesday: Housing Price Index, S&P/Case-Shiller Home Price Indices, Consumer Confidence survey.
Wednesday: New Homes Sales.
Thursday: Initial and Continuing jobless claims, Core Personal Consumption Expenditures, Personal Consumption Expenditure Prices, Durable Goods Orders, Non-defence Capital Goods Orders, and GDP data.
Upcoming Corporate Earning Reports:
Friday: Verizon Communications, American Express Company, ICICI Bank, Schlumberger, HCA Holdings, Sika AG, Great Wall Motor Co, Huntington Bancshares, Inc., Regions Financial Corp., Autoliv
Monday: Hyundai Motor Company, Cadence Design Systems Inc., Philips NV, Packaging Corporation of America, Discover Financial Services, W.R. Berkley Corporation, Brown & Brown Inc.Sun Communities
Tuesday: Alphabet, Twitter, Visa, Inc., Coca-Cola Co., Novartis AG, United Parcel Service, Texas Instruments Inc.Chubb Ltd., General Electric Company, 3M Company, Sherwin-Williams Company, Biogen, Kimberly-Clark Corporation, Enphase Energy, Spotify
Wednesday: Thermo Fisher Scientific, Bristol-Myers Squibb, Automatic Data Processing Inc., Boeing Company, General Dynamics, CME Group, Boston Scientific Corporation, Hess Corporation, Canon Inc., Garmin
Thursday: Amazon, Pinterest, Mastercard, Samsung, Merck & Company, Shell, McDonald's Corporation, T-Mobile US, Comcast Corporation, Honeywell, Intel Corporation, Caterpillar, Anheuser-Busch InBev, Gilead Sciences, Northrop Grumman, Edwards Lifesciences Corporation, DexCom, T. Rowe Price Group, CBRE Group, Willis Towers Watson, Fujitsu
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