Halyard’s Weekly Wrap – 09/23/22 – The Blind Leading the Naked?
As was expected, the Fed raised the overnight lending rate corridor by 75 basis points, to 3.0%-3.25% and in decidedly hawkish post-meeting press conference, the Chairman signaled that they are not yet close a peak in the rate. It was communicated that Fed funds would likely end the year at 4.25%. That news rocked the Treasury market with the 2-year note closing the week 32 basis points higher at 4.19%, just off the intraweek high of 4.25%. The yield curve further inverted, closing at a -57 basis points, just a shade below the -75 basis points touched in May 2000.
Equity investors were equally dismayed by the news. The S&P 500 closed the week down approximately 5%, and now stands about one percent above the low hit in June, with last week’s FedEx news continuing to reverberate through the market.
In addition to the Fed raising interest rates, the Swiss National Bank also hiked, eliminating the last negative interest rate in Europe. Traders were looking for a 1.0% move, greater than the 75 basis points the SNB delivered.
Both the BOE and the ECB continue to strike a hawkish stance, but investors are doubtful that they’ll follow through with the same zeal as the Fed. Evidence can be found in the currency weakness of the two. Versus the U.S. dollar, the Pound closed nearly 5% lower and the Euro nearly 3% off last week’s close. The fall in the pound was exacerbated by the news that the U.K. intends to cut taxes in an effort to combat what was termed an ongoing recession.
On the other side of the globe, the Bank of Japan continues to be a dovish holdout, reaffirming their commitment to holding interest rates at artificially low levels. That policy has caused a nearly 20% devaluation of the Yen versus the dollar this year. In an attempt to stem the decline, the BOJ intervened to buy Yen for the first time in over two decades. The weakening Yen makes imports more expensive for Japanese consumers, thereby worsening inflation in the country. Nevertheless, currency manipulation never results in a favorable outcome. We’ll be curious to see if the intervention will embolden speculators to sell more aggressively.
As we close out the week, the markets don’t feel anywhere near equilibrium. With that, we expect volatility to continue into quarter-end next week.
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