Rising rates have no brakes

Interest rate expectations increase as the Fed and Bank of England both hike central bank rates

On Wednesday, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds target range by 0.75% to 3.00-3.25%, the third consecutive hike of this size in what is now the most aggressive campaign to tighten monetary policy in the U.S. since 1981. The hike was in line with the long-term goal of the Federal Reserve to lower inflation to the 2% target range while simultaneously maximizing employment. However, economists interpreted Fed Chairman Jerome Powell’s statement following the announcement as an admission that the previously stated aim of cooling the economy without excessive job losses is becoming increasingly unrealistic. Market expectations for future USD interest rates have increased since the announcement, with the 3yr USD swap rate trading up to 4.79% on Friday, compared to 4.05% at market opening on Monday.

On the other side of the Atlantic, the Bank of England held its delayed Monetary Policy Committee meeting following the death of Queen Elizabeth II. The committee voted five to four to raise the U.K base rate by 0.50% to 2.25% with the four outstanding members split three and one for hikes of 0.75% and 0.25% respectively. Similar to USD, expectations for future GBP interest rates increased considerably over the course of the past week. The 3yr GBP swap rate opened last week at 3.98% and climbed high as of Friday morning to 4.79%.

Managing volatile and increasing interest rates globally has been an ongoing concern for corporate clients over the course of 2022.

(Related insight: Watch, “Chatham's Q4 2022 outlook: Inflation, market volatility, and LIBOR transition”)

The Bank of Japan intervenes in currency markets for the first time since 1998

In line with recent trends, USD continued to strengthen throughout the week. On Friday, GBP-USD dropped below 1.09, the lowest level since the 1980s. Furthermore, for the first time in 24 years, the Bank of Japan intervened to strengthen the Yen, which lost a fifth of its value against the dollar this year. The move led to the most volatile trading session for the currency since 2016, with the Yen strengthening over 2% against the dollar shortly after the announcement.

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

Wheat increases as commodity market volatility remains high

High volatility in global commodity markets continued over the week with the war in Ukraine putting continued pressure on supply chains worldwide. The price of wheat, which Ukraine was one of the largest worldwide exporters of in 2021, increased over 7% throughout the week. On the other hand, natural gas prices fell on Thursday as the market gained confidence Europe will have sufficient gas supplies for the coming winter.

(Related insight: Read, “7 ways to maximize FX and commodity hedging impact while minimizing costs”)

The week ahead

The consumer confidence index, jobless claims, real Q2 GDP revision, and consumer spending figures will be released this week. Markets will closely follow the impacts of last week’s rise in interest rates.