Weekly outlook: BoE and Fed set for further 'breathtaking' rate rises

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28 October 2022

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Portfolio Adviser

Monday 31 October

– Manufacturing purchasing managers’ indices (PMIs) from China
– EU inflation
– US Senior Loan Officers survey
– In Asia, quarterly results from Foxconn
– In the US, quarterly results from Stryker, NXP Semiconductors, ON Semiconductor and Lattice Semiconductor

Tuesday 1 November

– Trading statements from Rentokil Initial and IWG
– Monetary policy decision from the Reserve Bank of Australia
– Manufacturing purchasing managers’ indices (PMIs) from Asia, Europe, the UK and USA
– US car sales
– US Job Openings and Labor Turnover Survey (JOLTS)
– In Japan, quarterly results from Toyota Motor
– In Europe, quarterly results from DSM and Fresenius
– In the US, quarterly results from Airbnb, Eli Lilly, Mondelez, Pfizer, AMD, Uber, Electronic Arts, Fox, Simon Properties, Clorox and Molson Coors

Wednesday 2 November

– First-half results from Next and Wizz Air
– Trading statements from Smurfit Kappa, GSK and Morgan Sindall
– ADP US payrolls survey
– US oil inventories
– In Europe, quarterly results from Novo Nordisk, AP Moller-Maersk, Wolters Kluwer and Vestas Wind Systems
– In the US, quarterly results from Qualcomm, CVS, Estee Lauder, KLA-Tencor, Ferrari, Yum! Brands, NewsCorp, Robinhood and Zillow
– US Federal Reserve policy decision

The Fed is expected to increase interest rates further, probably matching September’s rise of 75bps. According to AJ Bell’s investment director, Russ Mould, and financial analyst Danni Hewson, a rate rise from the Fed is a certainty. It currently sits at 3.25%, with inflation up at 8.2%; Mould and Hewson noted that the last time CPI inflation was that high, in early 1982, the Fed Funds rate was 14%.

Mould and Hewson said that markets are expecting an increase of 75bps, bringing the rate to 4%. The hiking cycle is set to continue, with rates expected to reach 4.75% in 12 months’ time.

Quantitative tightening (QT) measures are also expected to be announced, as the Fed looks to shrink its balance sheet by $95bn a month. Mould and Hewson added that the Fed began QT in June, and doubled its pace in September.

The Fed currently has $8.8trn in assets on its balance sheet.

Thursday 3 November

– First-half results from Sainsbury, RS Group and Trainline
– Trading statements from Smith & Nephew, Rolls-Royce, Howden Joinery, OSB and Lancashire
– Services purchasing managers’ indices (PMIs) from Asia, Europe, the UK and US
– Challenger, Gray & Christmas job losses survey
– US weekly unemployment claims
– In Europe, quarterly results from BMW, ENEL, ING, Orsted, Stellantis and Zalando
– In the US, quarterly results from ConocoPhillips, Starbuck’s, Zoetis, Moderna, Microchip, Barrick Gold, Kellogg, DoorDash and Skyworks
– Bank of England policy decision

The BoE, like the Fed, is expected to raise rates once more, with the market predicting an increase of 75bps, according to Laith Khalaf, head of investment analysis at AJ Bell. He argued that since the Treasury and the BoE are no longer at loggerheads, as they were during much of Liz Truss’ short stint as PM, the BoE will not need to slam on the brakes quite as hard.

Mould and Hewson, on the other hand, believe markets have priced in a larger rise of 100bps, which would take the base rate to 3.25%. UK interest rates are set to reach 5% in 12 month’s time, with AJ Bell’s Khalaf calling the rise “breathtaking”, especially considering that rates were down at 0.1% near this time last year.

The UK base rate is currently 2.25%, with CPI inflation hitting double digits at 10.1%.

As for QT, Mould and Hewson expect it to start in November, as the BoE tries to shift £80bn per year from its balance sheet. However, the pair said that this could prove difficult, especially considering the scale of the BoE’s gilt-buying scheme after the Kwarteng’s mini-budget chaos. The banks now owns over £800bn of gilts.