Inflation risks are still skewed upward. China is targeting green energy

The US dollar rose about 0.45% last week, helped by rising US Treasury bond yields. While the overall annual consumer price Index slowed slightly in September, the core Index increased to its highest level since 1982, a sign that price pressures in the US economy remain consistently high. With inflation risks skewed upward, the Fed is likely to continue raising interest rates in the coming months, even if a cycle of aggressive tightening triggers a recession in the economy. On Saturday, the US Fed spokesman Bullard said last week's consumer price Index data showed that inflation had become "harmful" and left the door open for a 75 basis point rate hike at the upcoming Fed meetings in November and December, but added that it's still too early to talk about it.

At the close of the stock market on Friday, the Dow Jones Index (US30) decreased by 1.34% (+0.73% for the week), and the S&P500 Index (US500) lost 2.37% (-1.77% for the week). The technology Index NASDAQ (US100) fell by 3.08% on Friday (-3.18% for the week).

This week is the start of the third-quarter earnings season in the United States. Analysts expect S&P 500 corporate earnings to rise 4.1% year-over-year, the slowest growth since the fourth quarter of 2020.

Bank of Canada Governor Tiff Macklem said there was a "broad consensus" at the IMF and World Bank meeting that inflation is the most immediate threat to "the present and the future."

Equity markets in Europe were mostly up on Friday. German DAX (DE30) gained 0.67% (+2.15% for the week), French CAC 40 (FR40) added 0.90% (+2.16% for the week), Spanish IBEX 35 (ES35) increased by 0.46% (-0.12% for the week), British FTSE 100 (UK100) closed Friday with 0.15% (-1.89% for the week).

According to Pierre Wunsch of the ECB Governing Council, government efforts to ease the energy crisis risk forcing the European Central Bank to raise interest rates more aggressively. Wunsch believes that it is already "reasonable" for the ECB to raise the cost of borrowing to 3% from 0.75%. Wunsch also added that a technical recession, usually defined as two consecutive quarters of shrinking output, is now a "baseline scenario" in Europe. However, that by itself is not enough to keep inflation under control.

Britain's new finance minister, Jeremy Hunt, promised to restore confidence in the British economy by fully reporting on the government's tax and spending plans. British Prime Minister Liz Truss appointed Hunt in an attempt to salvage her leadership as confidence in her ability to run the country dwindled. Investors have been actively selling British government bonds since Sept. 23, when Hunt's predecessor, Kwasi Kwarteng, announced a series of unwarranted tax cuts without publishing a series of independent economic forecasts. The side effects forced the Bank of England to intervene in an emergency to protect pension funds and increased the cost of mortgages, further exacerbating the finances of Britons. The first test for Hunt and Truss will come as early as today when trading on the bond market resumes without the support of the Bank of England's bond purchase program, which expired on Friday.

In the oil market, the situation remains tense. The White House noted last week that OPEC+ production cuts would boost Russia's revenues, increasing funding for its invasion of Ukraine. In response, Saudi Arabia's minister said the October 5 decision to cut production by 2 million BPD was unanimous and based on economic factors, with OPEC+ countries seeking to maintain balance in oil markets. Experts believe that OPEC+ is manipulating prices to keep the price of "black gold" above $90 per barrel.

Asian markets traded flat last week. Japan's Nikkei 225 (JP225) jumped by 0.43% over the week, Hong Kong's Hang Seng (HK50) decreased by 4.94% over the week, and Australia's S&P/ASX 200 (AU200) lost 0.06% over the week.

In his speech at the opening session of the ruling Communist Party's five-year congress, Xi Jinping said that China will prioritize protecting the environment and promoting a green lifestyle and that preserving nature is an integral part of building a modern socialist country. China will support low-carbon industries, pursue an "energy revolution," and build a new energy system while continuing to promote the clean and efficient use of coal. "China's international influence, attractiveness, and ability to shape the world have increased significantly," Xi said Sunday in Beijing in a wide-ranging speech. Nevertheless, he warned of a more volatile international environment, saying that China must be prepared for "strong winds, high waves, and even dangerous storms." Analysts believe that the issue here is an increase in tensions between the US and China. Beijing's actions to suppress dissent in Hong Kong and Xinjiang, its lack of transparency about Covid origins, its partnership with Russia amid its invasion of Ukraine, and its more aggressive stance toward Taiwan have all increased tensions between the world's two largest economies. Xi Jinping is expected to retain his position and consolidate his power when the new leadership is announced in about a week. Economists also expect Beijing to miss its annual gross domestic product target by a wide margin this year for the first time since it began setting such targets in the early 1990s.

Bank of Japan Governor Kuroda said Saturday that inflation in Japan is rising mainly because of cost-push factors, so the Bank of Japan will continue to keep its monetary policy soft.

On the commodities market, lumber futures (+10.55%), oats (+4.45%), and orange juice (+1.43%) showed the biggest gains by the end of the week. Futures on silver (-10.15%), coffee (-9.54%), palladium (-8.59%), WTI oil (-7.65%), Brent oil (-6.6%), natural gas (-4.03%), gasoline (-3.77%) and gold (-3.46%) showed the biggest drop.

S&P 500 (F) (US500) 3,583.07 −86.84 (−2.37%)

Dow Jones (US30) 29,634.83 −403.89 (−1.34%)

DAX (DE40) 12,437.81 +82.23 (+0.67%)

FTSE 100 (UK100) 6,858.79 +8.52 (+0.12%)

USD Index 113.30 +0.94 (+0.83%)

• – China Export (m/m) at 06:00 (GMT+3);
• – China Imports (m/m) at 06:00 (GMT+3);
• – Japan Industrial Production (m/m) at 07:30 (GMT+3);
• – Italian Consumer Price Index (m/m) at 11:00 (GMT+3);
• – US NY Empire State Manufacturing Index (m/m) at 15:30 (GMT+3);
• – Canada BoC Business Outlook Survey at 17:30 (GMT+3).

by JustMarkets, 2022.10.17

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.