On Friday, most global stock markets experienced declines, further continuing a recent downward trend, driven by concerns that central banks may need to persistently raise interest rates to combat rising inflation. Officials from various countries, including the United States and Switzerland, have issued warnings about the necessity of further tightening measures. Meanwhile Japan’s Central Bank hold the rates at current level, though markets wait for Central Bank Governor’s speech.
Equity markets faced a challenging week, particularly with the Federal Reserve’s “dot plot” signaling a potential interest rate increase before year-end, albeit with fewer cuts than initially anticipated for the following year. This outlook gained support from recent data revealing a drop in US unemployment benefit applications to the lowest level since January, indicating a robust labor market.
The probability of additional tightening pushed 10-year Treasury yields to a 16-year high. Central banks in Sweden, Norway, and Switzerland also signaled potential future rate hikes due to persistent inflation.
While Federal Reserve policymakers deliberate their next steps, former St. Louis Fed chief James Bullard suggested the need for further rate hikes to prevent an inflation resurgence, which remains above the bank’s 2% target. Former Treasury Secretary Lawrence Summers cautioned that officials might be overly optimistic about the economic outlook, potentially underestimating inflation while overestimating economic growth.
Despite these concerns, several policymakers expressed confidence in the United States’ ability to avoid a recession even with rates reaching two-decade highs. The prospect of prolonged higher borrowing costs rattled equity markets, resulting in declines in major Wall Street indexes, as well as in Paris and Frankfurt.
In Asia, markets in Tokyo, Sydney, Seoul, Singapore, Taipei, and Wellington recorded losses, although Hong Kong and Shanghai saw a rebound due to bargain-buying.
The Bank of Japan is expected to maintain its negative interest rate policy and continue its yield curve control, which involves maintaining a narrow band within which bond yields can fluctuate.
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