Investment Institute
Weekly Market Update

Take Two: Fed and Bank of England hike rates; Eurozone inflation hits fresh high

  • 07 November 2022 (5 min read)

What do you need to know?

The US Federal Reserve (Fed) delivered its fourth consecutive 75-basis-point (bp) hike, in line with market forecasts and taking interest rates to 3.75%-4%. Fed Chair Jerome Powell suggested rate increases would continue until “sufficiently restrictive” to curb inflation – with the peak rate likely to be higher than had been expected – but suggested the Fed would moderate the pace of tightening over the coming meetings. The Bank of England also raised interest rates by 75bp, its largest hike since 1989, pushing rates to 3%, as it warned of a “very challenging” outlook for the UK economy.

Around the world

Annual inflation in the Eurozone reached a new record in October at 10.7%, up from 9.9% in September, while third quarter (Q3) GDP growth slowed to 0.2% from 0.8% in Q2. The contrast highlighted the dilemma facing the European Central Bank, but ECB President Christine Lagarde said rates must keep increasing to tackle rising prices even as the risk of recession grows. The ECB has an inflation target of 2%. There was more difficult news as the final Purchasing Managers’ Index showed manufacturing activity fell to 46.4 in October, its lowest level since May 2020, with the composite index including services at a 23-month low of 47.3. A figure below 50 indicates contraction.

Figure in focus: ¥6.3trn

The Japanese government spent ¥6.3trn ($42.8bn) in October as part of its intervention to support the yen, after the currency hit a 32-year low against the US dollar. One dollar was worth more than ¥150 around the middle of last month, but since then has traded in a range of about ¥145-149. Meanwhile, Japan’s factory output in September fell 1.6% from the previous month, the first drop in four months, likely driven by rising material costs and a global economic slowdown. Retail sales in Japan grew for the seventh consecutive month in September, up 4.5% year-on-year, reflecting a revival in consumption following COVID-19.

Words of wisdom:

Solar canals: The idea of building solar canopies over existing man-made waterways to generate renewable electricity and reduce water evaporation. Solar canals may be able to offer a sustainable means of providing water to remote communities in developing nations, but a key test project is expected to break ground in the coming months in California – which has a goal to produce 100% of its energy from renewable sources by 2045. The $20m ‘Project Nexus’ is envisaged as part of efforts to tackle persistent drought conditions in the region and aims to install 8,500 feet of solar panel canopies by 2024.

What’s coming up

The United Nations climate change conference COP27 takes place this week and next and is expected to prompt calls for greater and faster climate action, against a difficult backdrop of energy security and affordability. The US midterm elections take place on Tuesday and will decide who controls the nation’s Congress. Economic data released this week includes Eurozone retail sales on Tuesday, when the Bank of Japan also publishes its Summary of Opinions. Chinese inflation figures for October are reported on Wednesday followed by US inflation on Thursday. On Friday, the UK reports the flash estimate of Q3 GDP growth.

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