Quilter Cheviot|Weekly Comment

Fed and ECB near end game; BoJ just getting started?

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Last week’s price action was dominated by central bank activities, with three monetary policy decisions from around the globe having a clear impact on markets. First up was the Federal Reserve (Fed) with news that the federal funds rate had been lifted to a 22-year high of 5.25%-5.50%, a resumption of increases following a hiatus in the cycle last time out in June.

The move was widely expected and as such market participants were far more interested in the accompanying communication for the future policy path. However, there was little clear signalling on this front, with Fed chair Jay Powell remaining coy and offering little more than saying the rate setters would follow incoming data closely before making future decisions.

While Fed decisions are typically the most impactful for global markets, on this occasion the meeting provided more subdued moves than those seen following the European Central Bank (ECB) less than 24 hours later. Similar to in Washington, there was no surprise in the change of interest rates announced in Frankfurt, although ECB president Christine Lagarde provided a clearer dovish signal sending the euro lower and European stock markets higher.

The 25-basis point move took the ECB deposit rate to 3.75% – a record high – and was the ninth consecutive rate rise. Followers homed in on a subtle change in the accompanying statement with the language used previously altered to suggest that perhaps the central bank would deliver no further rate increases. There has been clear progress made in the fight against inflation in the Eurozone, but consumer price measures still have the latest year-on-year increase at just under 6%, well above the central bank’s 2% target and also significantly higher than the equivalent reading in the US that has fallen to 3.0%.

JGBs surge to nine-year high

In the early hours of Friday morning The Bank of Japan (BoJ) gave the surest sign yet that it is in the process of moving away from the ultra-loose monetary policy implemented in recent years. Although the BoJ overnight rate was maintained at -0.1%, there was a potentially significant shift in the central bank’s yield curve control policy, as the effective cap on 10-year bond yields was lifted to 1.0% from 0.5% with the announcement that 1.0% is the level that the BoJ will step into the market.

The main market impact happened during Thursday’s US session as news leaked of the impending move and its impact was felt further afield than in just Japanese assets. The US 10-year yield moved sharply higher, and stocks dipped lower as markets reacted to the perceived drop in relative attractiveness of overseas assets to Japanese investors.

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