Dear clients,
Barely have the markets began to get used to the idea of a dovish stance from the Fed, as the unpleasant data on US producer inflation threatens to rain on parade, making for a nervous wait of the consumer price data to be released later today.
For now, the unchanged and — for equity investors — very welcome statement from Fed officials that caution should be exercised before further rate hikes drowns out any concerns about the data.
Asia-Pacific stocks picked up the baton from Wall Street, with Japan’s Nikkei and Hong Kong’s Hang Seng both rising more than 1%.
But how quickly markets reversed earlier in the week shows how quickly they can pull back. Despite the dovish notes, the Fed’s underlying message remains that rates will rise as much as necessary to contain inflation.
While the prospect of US bond yields returning to 16-year highs above 5% is certainly a risk, there is a sense that the ceiling could be lower, while safe-haven assets are currently in demand amid geopolitical risks.
It’s a big day for UK data too, with GDP and industrial production data coming out first.
At its meeting last month, the Bank of England kept interest rates unchanged for the first time since the start of the interest rate tightening cycle in December 2021, but traders are putting the possibility of another rate hike before the end of the first quarter of next year at stake.
