On hold: U.S. Federal Reserve, Bank of England leave rates unchanged

On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and ESG and Active Ownership Analyst Zoe Warganz discussed recent decisions from key central bank meetings. They also provided an update on third quarter earnings season from around the globe and reviewed the latest headlines from China.

U.S., UK central banks signal higher for longer rate environment

Warganz and Cousley opened the segment by examining the latest rate decisions from key central banks, including the U.S. Federal Reserve (Fed), the Bank of England (BoE) and the Bank of Japan (BoJ). Starting with the Fed, Cousley noted that the U.S. central bank recently opted to hold rates steady for the second time in a row, leaving its overnight rate unchanged at 5.25%-5.5%.

"In the follow up press conference, Fed Chair Jerome Powell indicated that the surge in longer term bond yields since late July has contributed to tighter financial conditions. In effect, the upward pressure on yields has done some of the Fed's job," Cousley said, noting this probably helped contribute to the central bank's decision to hold rates steady.

He added that Fed officials still appear somewhat concerned about the potential for stronger growth over the next 12 months, which is keeping them slightly hawkish. Overall, however, the decision to keep rates unchanged was well telegraphed by officials and therefore expected by markets, he said.

Cousley explained that a similar story played out in the UK, with the Bank of England voting 6-3 to keep rates on hold in its 2 November meeting. Bank officials there noted that with inflation still running too high, interest rates would likely have to remain at higher levels for a longer period of time, he said. However, the BoE did add that the UK labour market is cooling and growth is slowing, Cousley noted. "Similar to the U.S., the UK looks to be entering a higher for longer rate environment," he added.

Perhaps the most interesting development the week of 30 October came from the Bank of Japan (BoJ), Cousley said, noting that Japan's central bank announced some tweaks to its yield curve control program. He explained that the BoJ, which buys longer dated government bonds in order to target a particular yield, has been widening its yield target band since July, moving it from 0 basis points (bps) to 50 bps to 100 bps.

"In this latest move, BoJ officials essentially did the smallest thing they could to allow for yields to move above 1%, but overall, they are moving toward a restrictive stance. Looking ahead, I think that sometime in the next six months or so, the BoJ will probably drop its yield curve control program entirely and allow the 10 year government bond to trade freely," Cousley concluded.

How is Q3 earnings season shaping up around the globe?

Shifting to third quarter earnings season, Cousley said the results from U.S. big tech companies have been pretty mixed so far, which is reflective of the broader U.S. earnings season overall. "It's been a bit of a mixed bag in the U.S., but in Europe, the picture looks more downbeat," he observed.

Cousley explained that third quarter earnings results have been much softer than expected in Europe, characterising European earnings as disappointing. In Japan, meanwhile, earnings season appears to be off to a better start, with early signs that Japanese companies may have fared better than expected last quarter. "For Japan, this is an encouraging development and lines up with our view that the Japanese economy is doing pretty well right now," he stated.

China steps up fiscal stimulus measures

Warganz and Cousley wrapped up their conversation with a look at the latest headlines from China. Cousley explained that the world's second largest economy still remains in a pretty soft place, but that the Chinese government has recently started taking measures that will put more fiscal stimulus to work as 2023 winds to a close.

For instance, there's been a recent increase in local government bond issuance, Cousley said, with China upping the amount of money that local governments can borrow for infrastructure and other projects. In addition, the central government also increased its budget deficit, he noted. "To me, this is a pretty big signal that China is trying to boost growth, and that officials are probably a little concerned that growth has been slower than they would have liked over the past 3-6 months," Cousley remarked.

Ultimately, these recent developments are fairly encouraging, as they signal that China is actively taking more steps to try to bolster its economy in the year ahead, he concluded.

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