Stock-markets were higher last week despite a sharp sell-off on Friday following a stronger-than-expected (yes, stronger) U.S. jobs report.
Positive economic news is not what investors are looking for at the moment because they are focused on the Federal Reserve’s reaction to data rather than the data itself. Inflation at 8% is the enemy and the central bank won’t relax until that number comes down sharply. It seems very unlikely that the Fed, eager not to repeat the mistakes of the 1970s, will begin reducing rates again until it is very clear that inflation has been defeated. Friday’s better-than-expected non-farm payrolls report will likely indicate to the Fed that its recent tightening policy is not doing enough. 263,000 jobs were added in September. Following the release of the report, stocks fell, and the US 10-year Treasury yield rose back towards its recent high of just above 4%.
Inflation in Europe rose to 10% in September and the expectation is for a further 0.75% rate hike imminently. Minutes of the ECB September meeting showed increasing concern among policy makers.
On Thursday the International Monetary Fund issued a further gloomy forecast for the global economy saying that Covid and the Russian invasion of Ukraine had caused a “darkening outlook” and that “the risks of recession are rising”. The IMF has now reduced its growth forecasts three times for 2022.
The Oil price rose sharply last week on news that OPEC+ (which includes Saudi Arabia and Russia) had agreed to cut production by 2 million barrels a day to keep prices high. This was in defiance of pressure from the US to pump more. Joe Biden was “disappointed by the short-sighted decision” at a time when the global economy is trying to deal with “the continued negative impact of Putin’s invasion of Ukraine”.
The Bank of England began this current week by ramping up its support for the bond market. The central bank said it would increase temporary Gilt buying operations to up to £10bn per day for the next 5 days to ensure financial stability in the U.K.
Also in this coming week, the market will begin to find out how inflation and interest rate hikes have hit corporate profits as US third-quarter earning season kicks off.
Thursday this week will be an especially important day with investors focused on the release of US inflation data.
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