Asia’s stock markets were quiet on Monday as investors prepared for a week filled with 13 central bank events that will undoubtedly result in higher borrowing prices everywhere, with a slight chance of a very large increase in the United States.
Markets have already been fully valued for a Federal Reserve rate increase of 75 basis points, with futures pricing in an 18% likelihood of a full percentage point hike.
They also indicate that, if the Fed were to put the economy into a recession to control inflation, 50-50 chance rates may rocket as high as 5.0–5.25%.
How much higher must the funds rate finally be? Jan Hatzius, the firm’s top economist, asked the inquiry.
His response is large enough to cause a tightening of financial conditions, which in turn keeps activity on a track that is firmly below potential growth.
On Wednesday, he anticipates a 75-basis point increase from the Fed, with two additional half-point increases expected in December and November.
The “dot plot” forecasts of rates made by Fed members, which are anticipated to be hawkish and predict that the funds rate will be between 4 and 4.25% by the close of this year and much higher next, will be significant as well.
Two-year Treasury rates increased by 30 basis points just last week to reach their highest level since 2007, which caused stocks to appear more costly in comparison and caused the S&P 500 to fall by roughly 5% for the week.
Due to festivities in Japan and the UK, Monday’s trading session got off to a slow start with S&P 500 futures up 0.1% and Nasdaq futures unchanged.
FTSE futures were closed, while EUROSTOXX 50 futures increased by 0.4%.
After falling over 3% the previous week, MSCI’s largest index of Asia-Pacific shares outside of Japan (.MIAPJ0000PUS) dipped 0.3%.
The Nikkei (.N225) index of Japan was closed, although futures predicted a figure of 27,400 as opposed to the 27,567 closing on Friday.
Blue chips (.CSI300) gained 0.3% as a result of China’s central bank acting independently and reducing a repo rate by 10 bps to boost the country’s struggling economy.
According to the most recent BofA fund manager survey, allocations to international stocks are at a record low.
However, BofA strategists cautioned in a note that a bad mood is insufficient to prevent the S&P from hitting new lows for the year as both U.S. yields as well as the unemployment rate are projected to reach 4-5%.
Even though 85% of all central banks around the world are currently in tightening gear, their collection of 38 unique economic indicators shows a bleak future for global growth.
Markets are divided on if the Bank of England will increase interest rates by 50 or 75 basis points, but most of the banks gathering this week, from Switzerland to South Africa, is likely to raise rates.
Jonathan Petersen, a veteran market economist at Capital Economics, said the most recent retail sales data in the UK support their assessment that the economy is essentially in recession.
Thus, notwithstanding the sterling’s recent multi-decade trough against the dollar, they believe the pound will continue to be under pressure given the relative resilience of the U.S. economy.
Sterling was stalled at $1.1436 after last week’s $1.1351 37-year low.
One notable outlier is the Bank of Japan, which, despite the sharp decline in the value of the yen, hasn’t yet indicated that it will change its ultra-accommodative yield curve policy.
On Monday, the dollar slightly increased to 143.08 yen after retreating from the most recent 24-year high of 144.99 in response to more stern intervention threats from Japanese regulators.
The European Central Bank’s increasingly hawkish remarks helped the euro maintain steady at $1.1009, up from its most recent low of $0.9865.
The dollar was stable against a basket of currencies at 109.68, barely below a two-decade high of 110.79 reached earlier this month.
Gold, which was trading around $1,672 per ounce after last week’s downtrend not seen since April 2020, has been negatively impacted by the strengthening of the dollar and rising interest rates.