FOMC minutes and UK data on the schedule

Federal Reserve Bank of Cleveland President Loretta Mester echoed recent remarks from other Fed officials, calling for the Fed to continue to raise interest rates to put inflation on a steady downward trajectory to 2%. In anticipation of another significant rate hike, Treasury yields rose to 4%.

The president of the World Bank and the managing director of the International Monetary Fund added caution to the market, warning of the growing risk of a global recession and stating that inflation remains an ongoing problem. The International Monetary Fund warned Tuesday that countries that account for a third of global output could face a recession next year.

Markets are now awaiting key US inflation data this week, which is expected to influence the Fed’s plan to raise interest rates. The minutes of the Fed’s September meeting, which will be released today, will also be monitored for more hawkish signals.

The UK unemployment rate fell to a new low. If markets are calmer ahead of the Bank of England’s November meeting, the Bank of England is likely to opt for a 75 basis point hike. But if market volatility persists and the pound continues to weaken, the Bank will be forced to act more decisively. Whether we get a 75- or 100-basis-point rate hike will depend on whether the government’s fiscal plan succeeds in stabilizing the markets at the end of October. For now, uncertainty in the UK bond market is forcing investors to sell off the pound and move into safe-haven assets such as the dollar index.

The number of Covid cases in China reached its highest level since August, with the spike coming after an increase in domestic travel during the National Golden Week holiday earlier this month. Shanghai and other major Chinese cities, including Shenzhen, stepped up testing as cases of the coronavirus increased, and some local authorities hastily closed schools, entertainment venues, and tourist spots. As a result, oil prices have fallen 3% since the beginning of this week amid falling demand.

Gold has fallen below $1,700 an ounce. Investors are moving into dollars ahead of key US inflation data this week and before FOMC minutes are released today.

Asian markets traded lower yesterday. Japan’s Nikkei 225 (JP225) lost 2.64% over the day, Hong Kong’s Hang Seng (HK50) fell by 2.23%, and Australia’s S&P/ASX 200 (AU200) was down by 0.34%.

China’s Central Bank on Tuesday spoke out against major exchange rate fluctuations, saying it would take steps to stabilize expectations and keep the yuan stable. The People’s Bank of China (PBOC) also said that the yuan does not necessarily need to weaken against the dollar. The Central Bank said it has plenty of policy options, many tools, and “extensive experience in effectively managing market expectations and ensuring exchange rate stability.

Markets are also waiting for China’s inflation and trade data, due out Friday, to get more signals about a potential economic recovery.

The Bank of Korea (BoK) raised interest rates by 50 basis points to 3%, bringing lending rates to the highest level in a decade. The move comes as the country struggles with inflation hitting a 24-year high this year, hitting Asia’s fourth-largest economy hard.