The run of three consecutive weekly gains came to an abrupt halt last week after the US Federal Reserve warned interest rates could go higher than markets expect as it strives to bring down inflation. The blue-chip S&P 500 fell 1.7% and technology focussed Nasdaq, which is more sensitive to changes in long-term interest rates, 3.9%. The FTSE 100, however, benefitted from its higher exposure to energy and materials stocks and gained 2.9%
Markets fully expected the Federal Reserve to hike its benchmark rate on Wednesday by 0.75% for the fourth time in a row but the hawkish tone of the subsequent press conference caught many investors off guard. Chairman Jay Powell warned the Fed still had “some ways to go” to get inflation under control and recent data suggested interest rates will have to move higher than previously thought.
Whilst Powell conceded that it takes time for higher interest rates to have an impact on inflation and economic activity, he made it clear that a series of moderating monthly inflation report is needed for the Fed to ease off. His comments sent US mortgage rates, which had only recently moved above 7% for the first time in 20 years, even higher.
The Bank of England’s Monetary Policy Committee met the following day, and as expected, also raised its benchmark interest rate by 0.75%. However, the decision wasn’t unanimous as two out of the nine members voted for more modest increases of 0.25% and 0.5%.
The split within the committee reflects the much more challenging economic outlook faced by the UK, and Europe, compared to the US. Dependence on imported energy has amplified inflationary pressures and both the Bank of England and European Central Bank are hiking interest rates at the cost of prolonging the inevitable recessions.
October’s monthly nonfarm payrolls report provided more evidence that the US economy is in a much better position to withstand higher interest rates. It revealed 261,000 more positions across the economy were added last month, better than the consensus analyst forecasts of 200,000.
It was another difficult week for technology companies, not just because of the prospect of even higher interest rates. Elon Musk announced he will cut Twitter’s 7,500 workforce by a half due to reduce losses of more than $4 million a day.
Since he acquired Twitter, which is now delisted from the New York Stock Exchange, companies including Carlsberg, General Motors, L’Oréal and Volkswagen have suspended advertising on the social media platform due to concerns over content moderation. Not all can be blamed on Musk’s desire for more “free speech” as companies have reigned in advertising spending across other platforms in the more challenging economic environment.
In contrast, airlines had a good week. EasyJet shares gained more than 8% on speculation that it could become a target for one of Europe’s larger airline groups, such as British Airways’ parent IAG, or Air France-KLM. The lossmaking budget airline has cut back its winter schedule and its shares trade around 75% lower than at the start of the pandemic.
Rival low-cost airline Ryanair has fared much better and reported a pre-tax profit of €1.4 billion for the 6 months to 30 September. In the same period a year ago it lost €100 million. CEO Michael O’Leary also revealed the Europe’s largest budget airline is “seeing very strong forward bookings”.
Chinese stocks were also standout performers last week amid speculation that authorities in Beijing are preparing to relax covid restrictions. The Shanghai CSI 300 and Hong Kong’s Hang Seng Indices rose 7.6% and 13.0% respectively. The markets have mostly held on to the gains despite the country’s National Health Commission reiterating its commitment to eliminating Covid-19 over the weekend.
The optimism over China also boosted energy prices last week and Brent Crude jumped $3 to $98 a barrel. China is the world’s largest importer of oil and any gradual return to normalisation of economic activity in the country would have a meaningful impact on demand-supply dynamics.
(Cover Image Source: Giorgio Parravicini)