Market Pulse

In focus

Central banks are still one of the main focus points for markets around the world as the synchronized tightening of monetary policy continues. How quickly and how far they move interest rates up are the questions both equity and fixed income markets keep asking.

The European Central Bank (ECB) is set to raise its policy rate above 0% for the first time since 2012 this week. After years of aggressively accommodative policy, the ECB will need to join other central banks in moving to contain rampant inflation. The ECB will also have to contend with an economic slowdown due in part to energy prices, which are a major concern for global markets, especially as winter approaches and the war in Ukraine continues to drag on.

In the U.S., the Federal Reserve (Fed) continues to convey that they will raise rates well into restrictive territory. The jobs report on Friday was yet another data point that gives them some leeway to continue to tighten monetary conditions. The “goldilocks” report showed that the U.S. economy is still adding plenty of jobs and pulling people back into the labor force. At the same time though, the unemployment rate increased, which is what some Fed officials believe needs to happen in order to curb inflation.

The bond market is still pricing in an economic slowdown, due to the Fed’s pace of tightening, as the 2/10-year U.S. Treasury yield curve remains inverted. However, the 10-year rose last week and re-steepened the curve, with fears of an eminent recession fading slightly. Stocks have continued to be choppy and have fallen as interest rates have risen. Higher rates have been weighing on valuations, with most of stocks’ declines this year coming from valuation contraction.

A look back

• Global stock markets were down again last week. Emerging markets underperformed and were down about 3.4%, while the S&P 500 dropped about 3.2% and international developed markets fell closer to 3%.
• The 10-year U.S. Treasury yield jumped 16 basis points (0.16%) while the 2-year was flat, steepening the 2/10-year yield curve while staying inverted.
• After months of uncertainty, the U.K. selected a new Prime Minister on Monday. Liz Truss will succeed Boris Johnson and will face a steep challenge for her country as it battles surging energy prices ahead of winter.

A look ahead

• The ECB and Bank of Canada meet this week to set their policy rates. The ECB is expected to raise rates above 0% for the first time in 10 years as it faces extreme inflation pressures across the union.
• The Fed will release its beige book on Wednesday, which gives insight into how each region may be faring economically.
• Economic releases: S&P Global U.S. & ISM Services Indices, S&P Global U.S. Composite Index, MBS Mortgage Applications, Trade Balage Book, and Wholesale Inventories.

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