Global Equity Markets, 7 November 2022
Global macroeconomic summary
Fed hiked 75bps to 4.0% on November meeting in line with expectations, but added a hawkish tone during the post-meeting press conference. The market-wide rally before the FOMC announcement proved to be short-lived as Chairman Powell’s comments quickly dissipated the dovish investor sentiment. As the Chairman noted, Fed has a clear-cut strategy that does not include ‘a pause’, implying that the hiking cycle is still far from over. Futures are now pricing in a terminal base rate of 5.14% (up from pre-meeting 4.96%) with the pivot expected in June 2023.
Stronger than expected US employment and weaker labor participation create more room for Fed hawkishness. Non-Farm Payrolls increased by 261,000 in October (vs 200,000 forecast), illustrating the tightness of US labor market. Moreover, unemployment rate also increased to higher-than-expected 3.7% (vs 3.6% forecast) due to a lower participation rate. In effect, the lower supply of labor will likely drive wages up, therefore fueling the inflation further. Incidentally, wages have also increased more than expected by 0.4% m/m (vs 0.3% forecast).
In October, the Eurozone headline inflation increased by more than expected to 10.7% y/y (vs 10.2% forecast), while the core stood at 5.0% (vs 4.9% forecast). Soaring prices pressure ECB to implement a contractionary monetary policy; however, the diminishing consumer confidence coupled with the steadily weakening production (as illustrated by falling PMIs) limit the European monetary authority’s degree of hawkishness.