According to the Arab Federation of Capital Markets, over the previous week, financial markets came under pressure after the US consumer price index report for August showed higher-than-expected inflation, hurting investor optimism for cooling prices and a less aggressive Federal Reserve where the central bank is expected to deliver its third consecutive 0.75% interest rate hike to push down inflation. As such, the US dollar hovers near a 20-year peak while US treasury yields continued their spike. In parallel, oil prices remained down on the week on fears that interest rate increases will curb global economic growth and demand for fuel. Gold prices slipped over the week as investors braced for aggressive rates hike as gold is known as a safe investment amid inflation woes, but high-interest rates increase the opportunity cost of holding non-yielding bullion.
Intense spike in short-term US Treasury yields on hot inflation data
On Tuesday, US Treasury yields climbed higher as investors digested the previous session’s dramatic market rout triggered by a hot inflation reading. In fact, the yield on the 2-year Treasury, the part of the curve most sensitive to Fed policy, surged by 17 bps to reach 3.83%, its highest level since 2007. Short-term US Treasury yields continued to rise on Thursday as investors weighed the prospect of larger rate hikes from the Federal Reserve at its meeting next week, before pausing on Friday after this intense spike across different time maturities. As such, the yield on the 2-year Treasury bond was down less than 1 basis point to 3.87%. The yield climbed above 3.9% earlier in the day, a level it had not seen since Nov. 1, 2007. The yield on the 10-year Treasury was down slightly at 3.45%.
In detail, US inflation rose more than expected in August as rising shelter and food costs offset a drop in gas prices, the Bureau of Labor Statistics reported on Tuesday. The consumer price index increased by 0.1% for the month and 8.3% over the past year. Economists had been expecting headline inflation to fall 0.1% and core to increase 0.3%, according to Dow Jones estimates. Within this context, a further 75 basis point rate hike from the Fed is being priced in by markets, but there is some anticipation that the next rate increase could be even higher near 100 basis points. On Wednesday, the producer price index showed a decline of 0.1% in August, according to a Bureau of Labor Statistics report Wednesday. On a year-over-year basis, the headline PPI increased by 8.7%, a substantial pullback from the 9.8% rise in July and the lowest annual gain since August 2021.
The US dollar index, which measures the greenback against a basket of six major currencies, reached near 110 on Wednesday, barely below early September’s 20-year peak at 110.8. The dollar is up nearly 15% against a basket of currencies this year, the highest since 1984’s 14.9% full-year rise. This rally in the US dollar suggests more pain almost everywhere else as other currencies either crush or require rapid rate hikes to stay firm. Gains against individual majors have been immense, with the dollar up about 12% on the euro this year, 16% on sterling, and 24% on the yen. In parallel, the Swiss franc hit its strongest against the euro since 2015, as the SNB also meets this week and there is some speculation in the market that it could join the Fed and ECB with outsized rate increases.
In parallel, a broad sell-off hit Wall Street on Tuesday after a hotter-than-expected inflation report dashed hopes that the Federal Reserve could scale back its policy tightening in the coming months. All three major US stock indexes veered sharply lower, snapping four-day winning streaks and notching their biggest one-day percentage drops since June 2020. The Dow Jones Industrial Average fell by 4.1% to 30,822 on a weekly basis, the S&P 500 lost 4.8% to 3,873 and the Nasdaq 100 dropped 5.8% to 11,861. Asian markets were weaker on Friday as investors braced for a U.S. rate hike next week amid growing concerns of a global recession following warnings from the World Bank and the International Monetary Fund. MSCI’s broadest index of Asia-Pacific shares outside Japan was down on Friday after US stocks ended the previous session with mild losses. The index is down 5.2% so far this month.
Oil prices on track for a third weekly loss on recession fears
Oil prices were on track for a weekly decline amid fears of sharp interest rate hikes that would slam global growth and hit fuel demand. Both benchmarks are headed for a third consecutive weekly loss, hurt partly by a strong US dollar, which makes oil more expensive for buyers using other currencies. The market was also anxious by the International Energy Agency’s outlook for almost zero growth in oil demand in the fourth quarter due to a weaker demand outlook for China. The slower oil demand pace in China, the world’s largest importer of crude oil, is also putting pressure on prices, with strict Covid lockdowns in various parts of the country, mainly Beijing which introduced new lockdown measures last week. Oil prices continued to fall on Thursday amid potential diminished oil demand from recession fears in the US. As such, Brent crude futures reached $91.6 but were down by 1.0% for the week. US West Texas Intermediate (WTI) crude futures were also down by 1.9% on a weekly basis.
Natural Gas
Natural gas prices dropped over the week, heading for a third weekly loss, as the European Union seeks consensus on its plans to ease the worst energy crisis in decades. Benchmark futures fell by around 3%, following extreme volatility this month. Rising gas stockpiles and ample supplies of liquefied natural gas have pulled prices back from August records, but they’re still more than seven times higher than the typical levels for this time of year. The European Commission this week proposed a number of measures to help reduce the impact of eye-watering energy prices on consumers. The plan includes raising 140 billion euros from energy companies’ earnings, as well as mandatory curbs on peak power demand and boosting liquidity. The price of gas continues to fall steadily, easing pressure on American consumers as the cost of filling a tank continued to tumble from record levels reached earlier in the summer. Gas prices fell by 10.6% in August, which helped moderate sky-high inflation, Tuesday’s Consumer Price Index report showed.
Gold prices to near 28-month low on mounting Fed rate hike fears
Gold prices weakened to near a 28-month low on Friday, heading for its worst week in two months, as prospects of aggressive rate hikes by the Federal Reserve lifted bond yields and took the shine off of the gold. Spot gold reached $1,663 per ounce, down by 2.6% for the week, after hitting its lowest since April 2020 at $1,660 on Thursday. It is worth mentioning that gold edged up slightly on Friday afternoon as the dollar faltered, but expectations of a sizeable US rate hike kept bullion en route to its worst week in four. Meanwhile, physical gold demand picked up in India as domestic prices fell ahead of key festivals. In parallel, spot silver gained 4.5% to $19.6 per ounce, platinum ticked up by 3.7% to $905.2, while palladium dropped by 2.0% to $2,137.0.
Cryptocurrencies
Cryptocurrency prices traded in tight ranges reflecting uncertainty about how far central banks will go in raising interest rates in the face of a slowing global economy and the major software upgrade of Ethereum on Friday, the most commercially important blockchain in the digital-asset sector. The decline in Bitcoin’s price continued and was trading below $20,000. On the other hand, Ether, the coin linked to the Ethereum blockchain and the second largest cryptocurrency, closed below $1,500 after Ethereum developers executed on Friday the “Merge”, an upgrade that eliminates mining and dramatically reduces the energy consumption of the world’s second-biggest cryptocurrency. In parallel, the dogecoin price was also marginally lower at $0.06 whereas Shiba tumbled about 3%. Other crypto prices’ performance also declined.
