Interest rate hikes escalated around the world in September, while the UK Pound weakened to its lowest level ever against the US Dollar and economic activity in energy and currency markets declined.
Several central banks escalated their interest rate hiking cycles in September, frontloading with sizeable hikes in their fight against inflation. The European Central Bank (ECB) hiked interest rates by 75 bps, the biggest hike on record, with guidance for more to come, in acknowledgement of European inflation data printing at another high of 9,1%. Several other central banks, including Australia, Canada and Norway, hiked interest rates in increments of 50 bps or 75 bps, while Chile and Sweden opted for a hefty 100 bps. The Bank of England hiked interest rates by 50 bps to 2,25%, leaving interest rates at the highest level since December 2008.
The United States (US) consumer price index for August benefited from lower fuel prices and decelerated to 8,3% year on year, from 8,5% previously. The moderation disappointed relative to expectations, while core inflation, excluding energy and food, surprised to the upside as shelter and medical care added pricing pressure. With this backdrop, the US Federal Reserve implemented a third consecutive 75 bps rate hike. New policy rate projections provided forecasts into 2025, emphasising remarks that monetary policy could keep interest rates higher for longer. An outlier in the current environment, low levels of inflation persisted in China with moderation in both consumer and producer price gauges, enabling the possibility of further monetary policy easing.
What started as three days of unscheduled maintenance, ended with an indefinite suspension of gas availability from Nordstream 1, the gas pipeline connecting Russian state-owned entity Gazprom and Europe. Despite the further disruption, European gas prices eased by about 36,4% as the European Union (EU) secured gas to fill 80% of storage capacity ahead of the coming winter. Later in the month, sabotage was suggested as a reason for leaks in the two Nordstream gas pipelines, despite neither being operational, highlighting the reality that the energy market is likely to remain a battleground and a risk to economic growth for the foreseeable future. The Brent crude oil price reflected weaker global growth expectations with a decline of about 8,8% in September and 23,4% over the quarter, with prices near levels last seen before the Russia and Ukraine conflict.
Currency markets have also been facing a battleground of sorts. A combination of meaningful interest rate hikes, tighter financial conditions, and hawkish comments from US policy makers, supported a US dollar gain of 7,1% over the quarter on a trade-weighted basis, bringing the year-to-date appreciation to a hefty 16,8%. This has been a big driver of currency declines and imported inflation for other countries and has prompted several economies, notably Japan, China, and the United Kingdom (UK) to act with efforts to prop up their currencies.
Weakening economic activity indicators against a backdrop of high inflation prints and more aggressive interest rate hikes sent markets climbing a wall of worry, with equity markets selling off across the board. Global bond markets also lost ground in September, with the US 10-year bond yield climbing to 3,8%. The Bloomberg Global Aggregate Bond Index declined by 6,9% over the quarter, bringing the year-to-date losses to 19,9%.
Changing of the guard
New UK Prime Minister, Lizz Truss, started her term with a mini-budget that caused historic market turmoil. The combination of increased spending to curb energy cost, tax cuts, implicitly higher debt levels and lifting of prior EU restrictions on banker bonuses, all intended to lift productivity and economic growth, stood in stark contrast with a central bank trying to decrease demand in the face of historically high inflation. The UK pound weakened to its lowest level ever against the US dollar, equity markets sold off and bond yields spiked to historic highs. This prompted the Bank of England to stabilise markets by purchasing longer dated bonds, as the 30-year bond yield spiked intraday to a historic 5,0%. At the time of writing, the finance minister had announced the withdrawal of tax cuts for the highest earners. It was a historic month in British history, which will also be remembered for the passing of Queen Elizbeth II, the UK’s longest serving monarch.
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