ECB sets record rate hike

Federal Reserve not focused on politics

A holiday-shortened week in the U.S. provided little economic data, but did see a number of FOMC members, including Chairman Jerome Powell, speak on the state of the economy. In his speech, Powell mentioned the Fed would not be distracted by politics in its quest to bring inflation down. He did not comment on whether the Fed would increase rates by 75 basis points for the third straight meeting or cut back to a 50-basis-point increase. Currently, markets are pricing in a 75-basis-point increase with over 80% probability. Interest rate hedging continues to be popular for corporates with floating-rate debt.

Record rate hike from ECB

Across the pond, the week was highlighted by a European Central Bank (ECB) record rate hike. The ECB hiked interest rates by 0.75% in response to high inflation and rising energy costs. The rate hike brings the benchmark rate to 0.75% following the rate hike in July that brought the rate from -0.50% to 0%. In a statement, the ECB “expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period.” The central bank also revised inflation expectations after prices increased by 9.1% in August, a new record. Earlier in the week, the Euro fell below 99 cents for the first time in over 20 years. The Euro’s descent corresponded with an announcement from Russian energy supplier Gazprom stating that it would no longer supply natural gas to Germany through the Nord Stream 1 pipeline due to a turbine malfunction. The Euro closed the week at $1.00.

(Related insight: Read, "Managing FX risk in a strong U.S. dollar environment")

Tight job market continues

Initial jobless claims for the week ended September 3 fell by 6,000 to 222,000. The 222,000 figure came in below expectations of 235,000. Continuing jobless claims for the week ended August 27 totaled 1.47 million, an increase of 36,000 from the previous figure. 1.47 million continuing jobless claims mark the highest point since April.

Oil falls for the second straight week

Despite rebounds on Friday, both WTI and Brent prices declined for the second consecutive week as demand fears affected the market. The ECB rate hikes, along with more COVID-19 lockdowns in China, weighed on prices. However, some analysts expect the drop in prices to end shortly with the continued risk of losing Russian energy supplies. Elsewhere in commodities, Henry Hub Natural Gas prices fell significantly, dropping nearly ten percent over the course of the week.

(Related insight: Read, "5 lies corporates tell themselves about commodity risk")

The week ahead

This coming week will be much busier, highlighted by a few major economic readings. Investors will have their eyes on August CPI data, which will be released on Tuesday. August retail sales will be released on Wednesday, while September’s consumer sentiment index reading will round out the week on Friday. With the unfortunate passing of Queen Elizabeth II, it was announced that Monday, September 19, will be a bank holiday in the U.K., triggering potential adjustments to various rate index settings and payment schedules on financial instruments.