The US Federal Reserve (Fed) reiterated last week at the Jackson Hole symposium that it is prepared to battle inflation even if doing so short- or medium-term by sacrificing economic growth. The rise in global risk aversion and US rate expectations drove the US dollar index to new 20-year highs. The US jobs report, a significant risk event, is already in the spotlight.
The yield curve inverted for the fourth week in a row, sending it to its most inverted point since 2000. Stocks responded negatively across the board, and consumer confidence hit an all-time low, despite Fed chair Jerome Powell acknowledging the pain ahead for businesses and households rather than just focusing on the strength of the US economy and the resilience of the consumer.
The Fed funds rate will be higher for an extended period, ending the rumors that rates will be dropped in the first quarter of 2023, increasing demand for the high-yielding greenback.
August saw a new high for inflation in the Eurozone, and future months are predicted to see an increase. According to data from Eurostat, the rise in inflation in August was caused by an accelerated growth in the cost of food, alcohol, and tobacco, which increased by 10.6% every year compared to a 9.8% increase in July.
Given the continuing rise in natural gas costs, it is anticipated that inflation in the Eurozone will rise further in the upcoming months, potentially hitting double digits. Furthermore, the reversal of several German subsidies and skyrocketing energy prices before the summer period indicate that inflation will continue to soar and surpass 10% before peaking around the turn of the year.
Since US Federal Reserve Chair Jerome Powell’s aggressive address at the Jackson Hole Symposium, there has been a noticeable change in tone among many European Central Bank (ECB) Members. For example, Joachim Nagel, the chairman of the German Bundesbank and a council member, said, “We shouldn’t delay the next interest-rate steps for fear of a potential recession.” This follows the slightly higher-than-expected German inflation statistics that were released. In July, consumer prices increased by 8.8% compared to the expected 8.8% increase.
The figures released end of August will undoubtedly strengthen arguments in favor of raising benchmark interest rates at the European Central Bank meeting next week. Next week’s central bank meeting is crucial since markets are heavily pricing in hawkishness; now, 70 bps are put in for September and 160 bps by the end of the year.
The Federal Reserve signaled its intention to fight inflation with higher interest rates, and the Japanese yen crossed the 140 level against the dollar, its lowest level since September 1998. This occurred during a widening policy gap with the US.
However, Bank of Japan Governor Haruhiko Kuroda underlined the necessity for ultra-loose monetary policy, claiming that the external factors currently driving domestic inflation will begin to subside in 2023. Junko Nakagawa, a member of the BOJ board, emphasized the necessity of continuing the current accommodative monetary policy in the face of dangers to Japan’s fragile economy, such as the rising cost of living.
The US Federal Reserve’s hardline stance against inflation and growing concerns of a global recession pressured risk-sensitive currencies, causing the New Zealand dollar to decline past $0.61 and breach the $0.605 level, putting it to its lowest point since May 2020.
Meanwhile, despite disappointing retail sales data, Reserve Bank of New Zealand Governor Adrian Orr recently stated that the bank’s main outlook is that the domestic economy is unlikely to experience a technical recession once second quarter GDP figures are in. Accordingly, the RBNZ raised interest rates for the seventh consecutive month in August by a widely anticipated 50 basis points to 3% and indicated that it intended to raise rates to a restrictive 4% level before stopping.
In response to traders’ bet that the Federal Reserve will likely maintain benchmark interest rates higher for longer following Powell’s Jackson Hole address, gold and silver prices declined for the fourth straight day on Wednesday.
The month of August saw gold see its fifth consecutive monthly decline, marking the longest such sequence in about four years. The yellow metal’s shine was diminished by Powell’s speech, which increased Treasury yields and the value of the dollar.
Loretta Mester, president of the Federal Reserve Bank of Cleveland, stated that she does not anticipate a rate reduction in 2023 and that the policy rate will need to be raised slightly beyond 4% by early next year. This is to bring high inflation back down to the central bank’s target.
Higher interest rates increase the opportunity cost of storing non-yielding gold, which reduces the appeal of the yellow metal, even though it is commonly seen as a hedge against inflation and economic uncertainty.
On Wednesday, the dollar index held steady at 108.5 and was on course to post a third consecutive monthly gain. This development was supported by strong expectations that the Federal Reserve will maintain high-interest rates until inflation returns to its target range.
In line with recent remarks from Fed Chair Jerome Powell, New York Fed President John Williams told the Wall Street Journal on Tuesday that he anticipates interest rates to rise further and remain there until inflation is contained.
The most recent data also revealed a rise in US job vacancies in July and a notable improvement in consumer confidence in August, supporting the Fed’s aggressive monetary policy. Before the US nonfarm payrolls report due on Friday, which could affect expectations, markets are presently pricing in a big 75 basis point rate hike in September.
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