Market recap: Week of 18-22 Sep 2023

Oil price increase

The Guardian: Demand for flights in the US, Europe, and China is on the rise, and it's fueling an increase in jet fuel prices. According to the Energy Information Administration (EIA), prices hit an average of $3.07/gallon by the end of August, marking a 50% increase from the $2.05 low in early May.

Traders and speculators are showing strong optimism, with net-long exposure on the rise. Large speculators are at their most bullish on WTI crude oil futures in 62 weeks, and managed funds are at their most bullish in 64 weeks.

Debt defaults

According to economists surveyed by Bloomberg News, the Federal Open Market Committee is expected to maintain rates within the 5.25% to 5.5% range at its September 19-20 meeting, with the first-rate cut anticipated in May, a two-month delay from July's economist consensus.

Meanwhile, Bloomberg reports Bank of America Corp. credit strategist Oleg Melentyev warns of a potential surge in defaults among US high-yield issuers. Melentyev suggests this wave could raise cumulative high-yield defaults to 15%, a significant increase from current levels, as the past 12 months have seen approximately 2.5% of US high-yield debt defaults, as reported by Fitch Ratings.

Interest rate hikes 

As reported by Reuters: Citi predicts that the Bank of England is likely to conclude its series of interest rate hikes with the upcoming increase on 21st Sept. However, they also suggest that a temporary pause in rate hikes should not be entirely ruled out. They project no change in November and a rate cut in May 2024.

Stubborn inflation

The Guardian: Bank of International Settlements warns of stubborn inflation & possible economic slowdown. Stock markets may underestimate risks. Chief Economist Claudio Borio notes tightening credit conditions, posing risks for businesses.

Government shutdown

The Guardian: The U.S. House Republicans cancel vote on short-term funding measure amid infighting. The House did not vote on a measure to keep the government open past September 30, sparking concerns of a potential government shutdown in 12 days.

A prolonged shutdown could impact GDP growth, with estimates from Goldman Sachs suggesting a 0.2% reduction each week, followed by a similar rebound in the quarter after it ends. 

Monetary policy

The Washington Post: The Monetary Policy Committee sent mixed messages, Bailey and Pill hinting at rate peaks, Mann advocating further tightening, and Dhingra deeming current policy restrictive. 

With August's expected uptick in inflation to 7.2%, July's GDP dip raised concerns, although Bailey and Deputy Governor Breeden emphasize avoiding a recession. 

UK Inflation

CNBC: U.K. inflation surprised with a dip to 6.7% in August, below expectations, potentially signalling a pause in interest rate hikes from the Bank of England today. The Office for National Statistics noted, 'The largest downward contributions to the monthly change in both CPIH and CPI annual rates came from food.' Goldman Sachs expects the Bank of England to keep its main bank rate unchanged at 5.25% on 21 Sept and has lowered its forecast for the terminal rate to 5.25% from 5.5% previously. 

Federal Reserve

The Wall Street Journal: The Fed maintained the target range for the federal funds rate at 5.25 to 5.5%. The Fed also announced its intention to continue reducing its holdings of Treasury securities and agency debt, as well as agency mortgage-backed securities.

Powell suggested that economic activity had been expanding at a solid pace. In the year so far, growth in real GDP has exceeded expectations. The labour market remained tight but was coming into balance. DoubleLine Capital's Gundlach noted that the chance of more rate hikes was higher due to a 'problematic' oil spike.

Yen intervention

Reuters: Japanese Prime Minister Fumio Kishida emphasizes the need to address the excessive yen movement driven by speculation, vowing to maintain a vigilant stance and intervene as needed to bolster the currency. U.S. Treasury Secretary Yellen acknowledges the rationale behind Yen intervention in the face of volatility. Experts like Atsushi Takeuchi note the significance of thresholds like 150, which hold political significance and serve as clear benchmarks in currency policy. 

Inflation decline

The Associated Press: Bank of England has opted to maintain its main interest rate at 5.25%, a level not seen in 15 years. This decision brings relief to numerous homeowners who have been contending with rising mortgage rates over the past two years. 

The bank's choice was notably influenced by recent news of an unexpected inflation decline to 6.7% in August, marking its lowest point since the Ukraine crisis in February 2022. Bank Governor Andrew Bailey stated, 'We'll closely monitor the situation to assess whether further rate adjustments are necessary. We prioritize sustaining higher interest rates for an extended duration to accomplish our objectives.’