September 23, 2022
Fixed Income Solutions
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Market Wrap
The week ended?September 23, 2022
Although the Federal Reserve’s (Fed) policy decision of a 75bps rate hike was broadly expected and commentary was materially similar to previous meetings, the result still triggered a sell-off in equities, a sharp rise in bond yields and a rallying U.S dollar. Emphasis was placed on the Fed's dot plot, which showed expectations of the Fed hiking another 125bps by year-end with the terminal Fed Funds rate to reach 4.60% in 2023 and 4Q22 real GDP growth at just 0.20% YoY, from the projected 1.7% back in June.?
Tensions further escalated in Eastern Europe last week as Russian President Vladimir Putin announced during a televised address to the nation that a “partial” troop mobilisation would commence, sending citizens who have previously served or currently form the reserve forces to the frontline, marking the first time since second World War. The address comes days after Russia announced plans to hold referendums in Russian-controlled regions of Ukraine, on becoming official Russian territories.?More, Putin denounced the interference from Western countries and openly stated that Russia would not refrain from using nuclear weapons to defend their country. These geopolitical tensions further uneased global investment markets, adding to the already fragile sentiment and further fueling the equity market rout.
The U.S yield curve inversion became further pronounced as the U.S 2-year treasury yield moved 33bps higher, topping 4.20%, its highest since 2007. The 10-year treasury yield also climbed for the 8th consecutive week, reaching 3.69%, up 24bps.
While strong corporate earnings and rates of default at historical lows have held credit spreads in relative check, we are beginning to see recession fears come into effect with credit spreads moving wider over recent weeks. Although, in many instances, credit spreads still look too narrow and do not adequately reflect the impending environment. We reiterate the importance of high-quality names with sustainable cash flows and strong balance sheets, and more specifically, those who are likely to benefit from the shifting cycle and improving supply-side constraints.?
Looking to Australian data, the 3-month BBSW moved 10bps higher to 2.91%. While the proxy for Australian corporate spreads, the Aus iTraxx, widened by massive 23 points last week, taking the index to 123; it has since been followed by another 10 points to 133, today.?
News and Data
Australia
With the National public holiday on Thursday and VIC public holiday on Friday, many made the most of the long weekend, leading to a relatively quiet week for news and data. Nothing significant to report.
United States
As anticipated, the Federal Reserve hiked interest rates by 75bps, the move pushed the rate to a range of 3.00% to 3.25%—a level last seen in 2008. Fed officials projected that rates would be increased by at least another 125bps over the final two meetings of this year.
Global
The Bank of England (BOE) announced a 50bps rate hike lifting the benchmark rate to 2.25% it was followed by a dire inflation forecast of 11%. While the UK government announced a string of tax cuts and large-scale fiscal support for households and businesses to aid economic growth heading into a period of great uncertainty. Markets didn’t take the news lightly, with concern about the UK government's financing needs based on the scale of these announced policies – with reports estimating ￡62bn of funding needed in the coming year. The British Pound was hammered against the U.S dollar, falling over 3.6% post announcement, leading to a weekly loss of near 5% to a post-1985 low of $1.08; it is now trading below $1.05. UK Gilts yields shifted significantly post announcement. The 2-year jumped 41bps to 3.911%, while the 10-year moved 32bps higher to 3.83%, on Friday.
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