The Federal Reserve raised rates by 25 basis points, as widely expected, maintaining a tight stance. This move appears to have temporarily soothed bond markets, as it is seen as addressing inflation concerns. Nonetheless, the persistent twin deficits remain significant, as they are the primary contributors to long-standing inflation challenges in the U.S. and other major economies.
After the Fed’s rate hike, the U.S. Dollar strengthened and remained robust throughout the week. The DXY index climbed by 1% last week, closing at 100.215, though this trend may not persist.
The Euro and the Pound mirrored each other’s movements again, as CPI in both currencies remains above 3%. The Bank of England kept rates unchanged with a 6-3 vote, as expected, yet both central banks are considering further hikes to manage inflation.
Commodity currencies fell for the second straight week, driven mainly by the Dollar’s rally. The AUD and CAD fell about 0.5% last week, while the NZD and NOK dropped more than 1% against the Dollar. In other FX news, the CHF fell 0.7%, and the JPY fared the worst, down 2.2%.
Oil prices finally paused their upward trajectory, stabilising after substantial recent gains. The situation in Iran remains precarious, with both parties standing firm, and there is hope for a lasting resolution. Last week, WTI was largely unchanged at around $100 per barrel.
Precious metals fared well despite the dollar’s strength. They may be forming a medium-term base, making the upcoming weeks critical. Last week, Gold rose by 0.6% to close at $4,378, and Silver increased nearly 3% to $66.25.
Bonds ceased their downward spiral as the Fed’s rate hike brought some calm to the markets. While short-term rate hikes are expected to eventually elevate longer-term yields, the markets remain stable for now. Governments and central banks cannot sustain high yields for long because of growing deficits and debt levels. Last week, the 10-year U.S. Treasury yield increased slightly to 5%, while the 10-year Bund remained flat at 120.468.
Equities fell midweek but rebounded toward the end. Rising yields typically challenge equities, and further increases could theoretically trigger a downturn. However, there’s currently no technical indication of a bearish trend. Last week, the S&P 500 index was flat at 7,660, and the DAX declined by 1% to close at 25,304 points.
Cryptocurrencies continued their recent upward trajectory. The likely catalyst last week was the potential for full tokenisation of stocks, enabling 24/7 trading. Currently, Bitcoin and Ethereum are both about 5% higher at $80,500 and $2,580, respectively.
The Week Ahead:
As the market processes the FOMC rate hike and potential future tightening, attention remains on the bond markets. If yields remain relatively stable, risk assets should continue to be supported.
Upcoming data includes interest rate decisions from the SNB, Norges Bank, and Banxico, along with a broad array of PMIs.
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