75 is the new 25

Many central banks are holding their monetary policy meetings this week. On 8 September, the European Central Bank raised rates by 75 basis points after an initial 50 point hike in July. Tonight (21 September), it is US Federal Reserve’s turn to announce further monetary tightening. The market believes there will be a third consecutive three-quarter-point increase. Some analysts are even considering a full-point increase. Tomorrow, it is the Swiss National Bank (SNB) that meet, and again the most likely scenario is a 0.75% increase. Admittedly, inflation has been lower in Switzerland (+3.5% over one year last month) and we are protected by a strong franc. But here, too, prices are following an upward trajectory that needs to be controlled, mainly in its underlying component (“core” inflation). In a way, the SNB is having to follow the timing and movements of its American and European counterparts in order not to be left behind. It would be uncomfortable to keep raising rates when, in a year’s time, other central banks might start to consider lowering them.

And central bank week continues: tomorrow, the Bank of England will also communicate on a new rate hike. The announcement was originally due to take place last week but the death of Her Majesty Queen Elizabeth II led to the postponement of the policy meeting. The market is split between a 0.50% and a 0.75% rise. Of the Bank of England, it too can be said it is “stuck” between the Fed and the ECB: in order to support a pound that has tumbled to its lowest level since 1985 against the dollar and to fight against galloping inflation, it will have to keep pace. As can be seen, the main central banks are making more substantial rate hikes than in the past, suggesting that “75 is the new 25”. Canada is another example of this trend, as its national bank raised rates by +0.75% earlier this month. Yesterday, Sweden went even further and surprised the market with a full-point rise.

From an economic point of view, the main news of the past week was the release of the US inflation figures. Overall, inflation fell slightly in August (+8.3% against +8.5%, annualized). But a closer look reveals that this is largely due to the fall in the price of oil. Foodstuffs, on the other hand, continue to get more expensive. Core inflation hit a high of +6.3% compared to +5.9% the previous month. Of course, this is likely to reinforce the Fed’s contractionary policy stance. We will find out today. The inversion of the US yield curve has become even more pronounced. A flattening suggests a slowdown, an inversion signals the onset of a recession and a steepening heralds a future economic recovery, goes the theory. This morning, the 10-year US Treasury bonds yield rose to 3.54% and the 2-year yield to 3.95%. This is the highest in 15 years. Equity markets, which are particularly sensitive to interest rates, continue to suffer. The US indices had their worst week since June: the S&P 500 is again below its 50-day moving average and the NASDAQ is down 27%, the Dow Jones 15.5% and the SMI 19% year-to-date.

Moving on to currencies, the dollar still reigns supreme. The Swiss franc is also strong: one franc is now worth more than one euro. On the other hand, it is clear that the yen and gold have lost their safe haven status for the moment. The ounce of gold broke through support the $1,700 support and the yen is at its lowest level since the 1990s: one dollar buys ¥143. In other words, the yen has lost 20% of its value since the beginning of the year.

In Europe, the economic situation is gloomy and the outlook not very encouraging. Industrial production fell sharply in July (-2.3%). In Germany, the economic sentiment indicator is at its lowest and the Bundesbank expects GDP to fall in the fourth quarter of 2022 and the first quarter of 2023. Yesterday, the eurozone trade balance recorded a deficit for the first time in 10 years. Soaring energy costs and the war in Ukraine are taking their toll. This morning, Russian president Putin once again chose to escalate and announced a partial military mobilisation of 300,000 reservists to meet the objectives of his “special military operation”. This announcement immediately caused oil to jump $2 per barrel and the euro, which was well below parity before the Fed’s announcement, to fall a little further.