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LGT Navigator: Monetary policy sets the pace – Dow falls below 30,000

June 17, 2022

In the wake of the sharp rise in key interest rates in the US, the Swiss National Bank (SNB) surprised with an interest rate hike of 50 basis points. With the first interest rate hike in 15 years, the SNB heralded the end of its negative interest rate policy and sent a clear signal regarding the fight against inflation, but also its independence. The Swiss franc gained strongly immediately after the interest rate decision. The Bank of England (BoE) also raised interest rates again, while the Bank of Japan (BoJ) is still sticking to its ultra-expansive monetary policy. On the capital markets, central bank decisions determined the sentiment, and on the New York Stock Exchange, the Dow fell below the 30'000-point mark for the first time since the beginning of last year.

Monetary policy sets the pace – Dow falls below 30,000

On Wall Street, the monetary policy decisions of the major central banks caused a sell-off. In particular, the surprise interest rate hike in Switzerland made it clear that central banks are being forced to slam on the monetary brakes quickly and aggressively in the fight against inflation, thus running the risk of triggering a global recession. On Wall Street, the Dow Jones Industrial fell -2.42% to 29'927.07 points, below 30'000 for the first time since early last year. The S&P 500 fell even more sharply by -3.25% to 3'666.77 points and on the Nasdaq technology exchange, the indices fell by around four percent. A stronger than expected decline in business confidence in the Philadelphia region also provided a negative impulse. The Philly Fed index, for example, fell by 5.9 points to minus 3.3 points in June, the first time it has been in negative territory since May 2020.

On Asia's stock markets, the trend remains mixed. In Tokyo, the 225-stock Nikkei index loses around -1.5% before the weekend, while in Hong Kong, the Hang Seng index is up around +1% and the Shanghai stock market barometer is also slightly up (around +0.3%).

SNB heralds end of its negative interest rate era

In view of the strong rise in inflation in Switzerland as well – +2.9% in May – the Swiss National Bank tightened its key interest rate by half a percentage point to a midpoint of -0.25%. In addition, SNB chief Thomas Jordan holds out the prospect of further interest rate hikes and thus also the end of the era of negative key rates. The Swiss franc strengthened immediately after the decision and gained strongly against the euro – EUR/CHF fell at times below 1.02. For its part, the SNB assured that it remains prepared to act against an appreciation of the franc on the foreign exchange market if necessary. In its latest forecasts, the SNB assumes that inflationary pressure will remain high. In the current year, considering the current tightening of interest rates, the SNB expects inflation to average +2.8%. For the next two years, the SNB forecasts an inflation rate of +1.9% and +1.6% respectively.

Bank of England hikes rates again

The British central bank has further increased its key interest rate. The key rate was raised by 25 basis points to +1.25%, but this had been widely expected on financial markets. Since the interest rate turnaround, this is already the fifth interest rate step, and more are to follow. The Bank of England held out the prospect of further interest rate steps to vigorously combat the persistent inflationary pressure. Most recently, the annual inflation rate in the UK reached +9.0% in May.

Japan's central bank still holding back

As expected, the Bank of Japan confirmed its expansionary monetary policy today and left key interest rate unchanged at minus 0.1%. The BoJ is also sticking to its purchases of government bonds and equities. The decision was made by eight votes to one. Japan's central bank is thus continuing to focus on the recovery of the economy and is still letting inflation take its course. However, at +2.1%, inflation in Japan reached a seven-year high in May and it may be a matter of time before the Bank of Japan also initiates the monetary policy turnaround. After the decision, the yen fell by around -1.5%. Recently, the Japanese currency reached a 24-year low against the dollar!

Economic Indicators June 17

MEZ Country Indicator Last period
05:00 JP Bank of Japan Monetary Policy decision  -0.1%
11:00 EZ Consumer Prices (May, y/y) +8.1%
11:00 EZ Core Consumer Prices (May, y/y) +4.4%
14:45 US Fed Governor Powell speaks
15:15 US Industrial Production (May, m/m) +0.4%
16:00 US Leading Indicator (May, m/m) -0.4%

 

Earnings Calender June 22

Country Company Period
SWE Volvo Capital Markets Day

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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