- US equities down sharply as Fed sets higher rate expectations following 0.75% rise
- US unemployment at 50-year lows
- Analysts expecting UK rate rise today of 0.5% to 0.75%
- Further fiscal loosening expected in tomorrow’s mini budget
- Pound at 37-year low against the dollar
- Putin raising the stakes as Zelensky calls for justice at the UN
Derren Nathan, head of equity research, Hargreaves Lansdown:
“The Federal Reserve will have surprised few commentators with its 0.75% rate hike yesterday, but gave a firm nod to the hawks that the direction of travel for the cost of borrowing is trending upwards. Looking ahead, the US central bank raised its medium-term expectations for federal funds rates, now predicting that they will hit 4.4% by the end of this year and 4.6% by the end of 2023 against previous guidance of 3.4% and 3.8%.
In Chair Powell’s statement he made several references to ongoing strength in the job market, with unemployment sitting at 50-year lows, and this is likely to give the Fed the confidence to embolden its stance against inflation. This did little to settle market nerves with the major US indices suffering in afternoon trading with the Dow, S&P, and Nasdaq all closing down over 1.7%. Brent Crude prices closed down 0.35% to $89.83 following the decision but have climbed back over $90 this morning.
The Bank of England’s Monetary Policy Committee, due to meet later this morning, could follow the Fed’s lead with its own 0.75% increase in base rates, which would be the largest such rise in over three decades. Some are expecting a more modest 0.5% hike in line with August’s decision. Either way this will be another blow to consumer spending power as higher mortgage payments compound the cost-of-living crisis.
There may be some relief in Kwasi Kwarteng’s mini-budget tomorrow where we are watching out for a range of potential tax cuts for both individuals and businesses. Measures we may see include a reversal in the recent National Insurance increase, cancellation of Rishi Sunak’s proposed higher rate of corporation tax on company profits and a cut to stamp duty on property sales. More details are also expected on the costs of intervention in energy prices. None of this comes for free and there are genuine concerns emerging about government debt levels, which of course are also getting increasingly expensive. With this in mind, there isn’t much short-term scope for a material recovery in Sterling from its current lows.
The Ukraine’s President Zelensky received rapturous applause for his video address to the UN yesterday which set out a 5-point peace plan that included punishment for Russian aggression. However, peace seems to be far from Vladimir Putin’s mind having summoned 300,000 reservists to action, and has raised the rhetoric on the potential use of nuclear weapons in Russia’s defence, explicitly stating that he wasn’t bluffing. There may be further jitters on the markets today.”
