Weekly Market Wrap | 23 September 2022

Third Triple Hike 3×3 

As widely expected, the Fed delivered its third 0.75% hike on Wednesday (21 September). Even before this move, the pace of Fed rate hikes this time round is the most rapid since the 80s. The S&P 500 fell more than 4% as Chair Powell’s comments and the most recent dot plot turned more hawkish. 

Image Credit: Schwab, as of Sep 13, 2022

Fed officials project that rate hikes will continue into 2023, and the target rate could be as high as 4.6% by end 2023. 

And the inversion deepens

With short term rates now above 3%, the yield differential between 2 year and 10 year treasury (usually positive due to term premium) turned negative. The 10 year yield is now lower than the two year yield, it should usually be higher as there is extra uncertainty due to investing further in the future. 

Yield curve inversion is generally taken to be a recession indicator and a sign that bond investors think that the Fed might be overly-aggressive in tightening.  However, without evidence that price stability is persistent, the Fed is likely to continue on their path of quantitative tightening. 

Image credit: Bloomberg

More Bearish? 

We are less than a month away from China’s Communist Party congress. Traditionally, it has been a good time for investors. According to Bloomberg, the MSCI China index typically generated 2% returns in the month before the party congress in the past. 

However, Chinese stocks have slid along global stocks in the last few months, despite pretty solid earnings, particularly factoring in numerous waves of partial lockdowns and a decline in economic activity. Investors are still quite pessimistic; fiscal stimulus and a rate cut lifted sentiments marginally, but any more meaningful policy changes could come in the next few months. 

Image credit: Bloomberg

Market Stats

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