Week in Review: ECB Hikes Rates

The move was broadly well received and comes against the backdrop of slowing growth in the region as the impact of the war in Ukraine and associated energy supply concerns has seen inflation running at record highs.

There was renewed political instability in Italy following the resignation of Prime Minister Mario Draghi, giving way to another national election on September 25. The Italian Prime Minister resigned his post on Thursday after failing to secure the backing of three of Italy’s four largest parties, which declined to back his reform agenda.

European shares rose for the week as market sentiment remained strong despite the ECB decision to raise interest rates and the political instability in Italy. In local currency terms, the pan-European STOXX Europe 50 Index ended the week 3.43% higher, while the UK’s FTSE 100 Index also gained 1.64%. The contest to replace Boris Johnson as leader of the Conservative Party and prime minister has come down to former British Chancellor of the Exchequer Rishi Sunak and Foreign Minister Liz Truss following a series of rounds of voting by Conservative members of Parliament. On September 5th, the U.K.’s new prime minister will be revealed.

In the U.S. all three major averages slipped on Friday, but managed to record a positive week with the Dow Jones (+1.95%), S&P 500 (+2.55%) and the Nasdaq (+3.33%) all ending firmly in the green. In a busy week ahead the Federal Reserve’s interest rate setting committee meets Tuesday and Wednesday and is expected to deliver another three-quarter point rate hike, while on the earnings front two of the largest U.S. companies — Microsoft and Apple — report Tuesday and Thursday, respectively. Google parent Alphabet releases results Tuesday, and Amazon reports Thursday. Meta Platforms, formerly Facebook, reports Wednesday. With about 21% of the constituents of the S&P 500 Index having reported actual results for Q2 2022 to date, 68% have reported actual EPS above estimates, which is below the five-year average of 77% according to FactSet.

On Thursday morning the White House announced that US President Joe Biden tested positive for COVID-19 but is apparently in good health and experiencing only mild symptoms.

Russian President Vladimir Putin said that Russian energy company Gazprom plans to fulfill its contractual obligations to deliver gas to Germany but that capacity may be reduced due to equipment repairs. On Thursday, Gazprom resumed gas shipments through the pipeline at 40% capacity, the level at which the pipeline was operating at before the 10 day shut down earlier this month for scheduled maintenance. The Nord Stream 1 pipeline delivers 55 billion cubic meters of gas per year, or nearly 40% of the European bloc's total pipeline imports from Russia.

In Asia, Japan’s stock markets rose over the week, with the benchmark Nikkei 225 Index gaining 4.20%, with the Bank of Japan (BoJ) maintaining its ultra-loose monetary policy to support the country’s still-fragile economic recovery. In China, the broad capitalization-weighted Shanghai Composite Index added 1.3% as Premier Li Keqiang tempered expectations of excessive stimulus and indicated flexibility on China’s annual growth target.

Market Moves of the Week

South Africa’s repurchase rate was pushed sharply up, by 75 basis points (bps) this week – the steepest hike since September 2002. The rate hike was announced by South African Reserve Bank (Sarb) Governor Lesetja Kganyago on Thursday, moving to front-load a more hawkish increase to rein in surging inflation (7.4% published on Wednesday). The repurchase interest rate was raised to 5.5% from 4.75%. This means SA’s prime lending rate (of commercial banks) will increase to 9%. Of the five members on the panel, three voted for the 75 basis-point increase, one preferred a 100-basis-point hike and the other 50 basis points. The central bank also raised its GDP forecast for 2022 to 2% from 1.7%.

South Africa’s annual inflation rate reached 7.4% in June, from 6.5% in May, the highest level since the global financial crisis, Stats SA reported on Wednesday. Fuel prices were 45.3% higher in June than the year before while food prices and non-alcoholic beverages surged by 8.6% year-on-year.

The JSE All-Share Index ended the week up 4.58%, mirroring the gains in global equities over the week with all three of the major sectors including resource (5.64%), industrial (5%) and financial (3.11%) shares all ending stronger. The rand firmed to end the week at R16.82 to the U.S. dollar finding support from the central banks surprise 75 basis point rate hike.

Chart of the Week

Federal Reserve Chair Jerome Powell is likely to slow the pace of interest-rate increases after front-loading policy with a second straight 75 basis-point hike next week. A survey of economists sees a big July increase, then a lift in rates by a half percentage point in September, and then shifting to quarter-point hikes at the remaining two meetings of the year.