29-08-2022
George Lucas, Raiz Group CEO
It’s still summer holidays in Europe, so again it was subdued on the news front. However, this week will be about the markets processing US Federal Reserve Chair Jerome Powell’s comments from Friday, which re-emphasised the central bank’s hawkish message.
During a speech at an event in Wyoming, Powell said the Fed must continue to hike interest rates to prevent inflation from becoming a permanent element of the US economy.
On the back of these comments the S&P 500 index fell 3.4%, while the Nasdaq Composite — dominated by tech shares more sensitive to interest rate expectations — slid 3.9%. It was the biggest one-day decline for both indices since mid-June.
Powell noted it would eventually be appropriate to ease the pace of tightening, but nonetheless stressed the costs of high inflation, and reiterated his commitment to tightening monetary policy, and keeping rates high for as long as needed to rein in inflation.
The comments are key as over recent months interest rates expectations had retreated on hopes the Fed would become less aggressive in raising rates to combat inflation.
However, Powell’s message, combined with broadly positive economic data for the US, has quickly reversed expectations that interest rates will drop back.
China heatwave cripples power supplies
In China, power shortages are likely to drag on, despite the heatwave there starting to abate. The drought remains severe and is putting significant strain on China’s national grid.
I mention this as Europe is also preparing for power shortages over the winter months and globally power shortages could become a factor in decreasing economic output, depending on the severity.
Still on China, there’s been a raft of recent policy support from authorities, including reduction in interest rates to support the economy. But this has not ended the Chinese stock market sell-off.
One key area of concern in China is falling values in the country’s property sector, which given its large size, is key to the health of the broader China economy.
Against this worrying backdrop, some recent policy measures announced by China authorities look aimed at the property sector, especially at reducing mortgage rates.
Beijing also announced it will guarantee the bonds of certain developers with stronger balance sheets. This has now been followed by the announcement of a program to channel funds to distressed developers to help them complete unfinished projects.
We need to wait and see if these policies help. Alternately, a more painful approach of restructuring most developers’ finances may be needed to halt declines in home sales and housing starts, and thus improve the prospects for the Chinese economy.
Bank of Indonesia makes surprise rate hike
Elsewhere, it was a bit of a surprise when the central bank of Indonesia hiked interest rates by 25 basis points, to 3.75%. There was also hawkish commentary so we can now expect further interest rate tightening this year in Indonesia.
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