Last night The Federal Reserve finally let the world into one of the worst kept secrets, that they will begin to reduce their monthly bond purchases as soon as November. However, there was a marked change in tone regarding interest rates, which are likely to be increased faster than anticipated. With inflation running hot, and projected to hit around 4.2% this year (over double the central bank’s target of 2%), nine of the eighteen Fed officials are ready to begin an interest rate hike cycle in response, in what is a far more hawkish approach from the Fed. This comes as policymakers revised GDP estimates from 7% down to a ‘measly’ 5.9%, which has predominantly been attributed to the prevalence of the Delta variant and the cascading effects it is having. This also resulted in forecasts for next year being revised down, from 3.8% to 3.3%, and the Fed held interest rates in range of 0% to 0.25%. The reality is, there is clearly a lot of concern for the pace at which the US economy is growing, and removing the fiscal support too soon will likely do more harm than good. Until the economic landscape surrounding the road out of the Covid-19 pandemic becomes clear, this uncertainty will persist.
Global investors and bankers are on tenterhooks as they watch this situation rapidly develop, which we have covered in detail. With a $305 billion mountain of debt, there are major implications globally if a resolution is not found, least of all because of the damage it could do to China’s financial system. However last night Hui Ka Yan, Evergrande’s chairman, took to the press to try and reassure investors that their top priority is to help redeem their investment products, despite there being a major doubt over whether a $83.5M bond interest payment will be made today. It is becoming more apparent that the priority may be to appease onshore investors first, before looking further afield to the global community who wait with baited breath to find out the scale of the damage, and what implications it may have. Suffice it to say, with Evergrande shares plunging 32% already today after a series of public holidays in China have come to an end, the situation is looking bleak. The concern is the risk of contagion, especially with so many lenders tied up in this, however many analysts believe that even if there should be a collapse, we would not see a “Lehman moment.” None the less, Fitch Ratings downgraded China’s growth forecast for this year from 8.4% to 8.1%, pointing to China’s slowdown in the property sector.
In his flamboyant style, Prime Minister Boris Johnson addressed the United Nations, almost hypocritically, telling the world to “grow up”, although this time, he may have a point. He was giving a speech regarding tackling climate change (with a major summit coming in Glasgow on the 31st October), when he said, “we have an awesome power to change things and to change things for the better, and an awesome power to save ourselves.” The United States have agreed to double their funding by 2024 to $11.4 billion a year, while China have agreed not to invest in any new coal fired power stations abroad. Both of these statements of intent gained praise from the Prime Minister, however he wanted more. “We must go further and we must go far faster.” The reason Boris is pushing so hard is due to a UN analysis of pledges made under the 2015 Paris agreement, where a target of a 45% reduction was needed according to scientists to avoid calamitous climate change. The analysis showed that by 2030 (the target date for the reduction), global emissions would be 16% higher than they were in 2010. Typically, Boris managed to undermine his salient points, with a juvenile reference to the Muppets character, Kermit the Frog, who famously sang, “It’s not easy being green”, by telling world leaders the fictional green puppet was wrong, “it is easy being green.” Truly, the gift which keeps on giving.
Further Rate Announcements
I am sure that many of us are only just recovering from the excitement of the Federal Reserve announcement regarding rates, along with the Bank of Japan and Riksbank before that, however we still have another flurry to look forward to! Today the Bank of England, Switzerland, South Africa, Turkey and Norway all have announcements on the subject. Norway are actually expected to raise rates this morning, and to then show guidance for further hikes, potentially in December and then again into next year. This is a significant step, as Norway would be the first of the world’s 10 most-traded currencies to begin post pandemic tightening. Eyes are on the Bank of England following a more hawkish statement from the Fed last night, the UK seems to be in a swamp of stalling recovery and accelerating inflation. This needs to be addressed sooner rather than later, however it is likely that their approach will remain unchanged for now. There is scope for GBP strength, should we see key policy makers vote for a taper alongside Michael Saunders.
Have a great day.
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