Centerfin Collective Weekly

Weekly Update Nov 4, 2022

Fed refuses to pivot, Geopolitical temperature rising, China hints at reopening

Fed refuses to pivot

All eyes were on the Federal Reserve this week as they announced their latest interest rate decision. While their 75 bps hike was widely expected, the market was looking for any indication of a pivot, i.e. that they would indicate either a decrease in the size of interest rate hikes or that they are close to being finished. While the market initially took some language in their press release as positive, during the press conference Chairman Powell made it clear that it is too early to discuss tapering. Stocks sold off dramatically on this, and yields on bonds rose. The terminal rate, where the market expects rates to end up, rose to above 5%. Fed watchers remarked that there is likely dissent building inside the Federal Reserve, with a contingent of Fed governors wishing to slow the pace of hikes. We continue to be concerned that the unprecedented pace of rate increases could have unintended consequences. Interest rate hikes are designed to slow the economy and hence cool inflation; however, this does not address other potential causes, namely de-globalization and demographics. Chairman Powell seems to be intent on not leaving a legacy of being the Fed Chair who let inflation get out of control and, in the process, break a few things. Watching how politics influence what is happening at the Fed in the near future will be interesting.

Geopolitical temperature rising

There were several notable geopolitical events this week raising the risks of new international conflicts. The US and Saudi Arabia raised concerns about an imminent attack by Iran on Saudi Arabia. Iran has been dealing with political protests and this could serve as a distraction. Adding fuel to the fire, Benjamin Netanyahu was elected the new Prime Minister of Israel. Netanyahu leads Israel’s right-wing party and has an aggressive stance toward Iran. Farther east, North Korea launched 23 missiles across neighboring airspace, causing South Korea to scramble jets and Japan to issue evacuation alerts in parts of the country. We are living in a time of heightened geopolitical uncertainty. While the risks of conflict remain low, they seem to be rising. This uncertainty ultimately gets priced into markets, serving as another source of volatility.

China hints at re-opening

This week marked the first signs of re-opening in China. Xi Jinping has been planning to take a third term as China’s leader and has kept the country under extremely tight Covid controls. As the Party Congress, China’s formal ceremony electing him as the leader, has passed, many expect restrictions to be eased. This week we heard of the intention to do so through official channels and indications that China would pursue “mutually beneficial cooperation” with the rest of the world. Being the world’s second largest economy, China is important to everything from the price of goods in the US to global commodity prices. We have long believed that there is a fundamental shift in the relationship between the Eastern and Western worlds, which means many old playbooks in markets will no longer work.

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