The Day at a Glance | october 4 2022

The Top

*Interest rates in the United States still haven’t reached restrictive territory, and the FED still has a long way to go with the increasing rates cycle: John Williams, NY FED.

*Mexico and the US agree to extend conversations about energy policies; they avoid requesting arbitration under the USMCA.

*Manufacturing activities in the United States decreased strongly during September, according to the ISM (50.9 vs 52.2e.).

*Inflation for producers continues to increase in Europe (43.3% annual, Aug.).

*The United States will announce new limitations on semiconductor and technology exports to China this week.

*North Korea fired a ballistic missile towards Japan for the first time in five years.

Economic environment

Markets challenge the FED`s message. In a public speech given in Phoenix, President of the New York FED, John Williams, assured that the FED`s monetary stance has still not reached a restrictive level concerning growth and that there is still much more left to do regarding interest rate hikes in order to achieve stability in prices. Williams reaffirmed that they must ensure they are taking the necessary measures in order to contain inflation and take it to its 2% target level. He acknowledged that the pace at which the rate is being hiked and its level before there is a pause in interest rate increases will be determined by inflation and the economy`s performance in the following months, but the 4.5% forecasted by members is necessary. He considered that the adjustment in financial conditions in recent months – observed in higher refinancing rates and drops in stock exchanges – could contribute to its task of cooling down consumption and aggregate demand in order to contain the rise in prices. This should eventually lead to a slower increase and an unemployment rate closer to 4.5% in 2023, he assured. Williams believes that markets are still functioning in an orderly manner despite greater volatility and less liquidity. However, markets have started to take into account that the FED could halt its increasing rates cycle in March of 2023 due to economic weakness and risks of a recession in an environment characterized by higher rates. The US manufacturing ISM logged its largest drop in activity in September since 2020, and events in other parts of the world (the Central Bank of England`s resuming bond purchases; a lower than expected increase in rates in Australia) are feeding the idea that central banks are leading up to a pause in their aggressive stances against inflation. With this, the dollar has weakened in today`s trading session and stock markets have logged a firm recovery along with long-term bonds. However, the last time that markets bet on a pause on behalf of central banks, they were surprised by decisive actions and inflationary data that still hasn’t allowed to confirm that rates have reached their highest levels.