The past week offered the market central banks’ interest rate decisions and macroeconomic figures. The focus was especially on the United States’ central bank, the Federal Reserve.
On Wednesday, the Fed said it would cut the key interest rate by 0.50 percentage points to a range of 4.75-5.00 percent. Director general Jerome Powellin inflation risks have eased and labor market risks have increased.
In the US, the central bank has targets for inflation and employment. Interest rates were calculated for the first time since 2020.
On Thursday, the United States Department of Labor said that the number of new applications for unemployment benefits decreased last week from the previous week. Claims for compensation were lower than economists’ forecasts.
Investors have feared that the Fed’s rate hikes would eventually lead to a recession. Thursday’s numbers gave confirmation to the narrative that the Fed would get out of the situation with dry feet.
How has the week been seen on the currency and interest rate markets?
The yen weakens after the central bank’s decision
Information service Bloomberg’s has made the dollar an index in which the development of the value of the dollar is compared to ten other major currencies.
The index has bounced drastically in different directions during the week due to the news on different days. However, it has returned close to the reading of the beginning of the week.
However, there are differences in currencies.
For example, the dollar has strengthened against the Japanese yen during the week. From the beginning of the week, the dollar fetched slightly less than 141 yen. On Friday, it fetched 143.66 yen. Today, the dollar strengthened by 0.7 percent from yesterday’s decision.
The Bank of Japan gave its expected interest rate decision today, i.e. there was no change in the interest rate level. Interest rates between the US and Japan narrowed after the Fed decided to cut the key interest rate.
When interest rates rise, higher interest rates will have to be paid for loans issued in the future. This can attract foreign investors to buy the debt securities of that country, which require the currency of that country to buy.
Against the euro, the dollar had fallen slightly compared to the reading of the beginning of the week. On Monday, the dollar fetched a good 0.90 euros, while on Friday it fetched 0.8954 euros. Today, the dollar weakened slightly against the euro.
Bond: For example, the state could offer a ten-year bond paper at a price of 1,000 euros with an annual coupon rate of 2.0 percent. In this case, the investor would get 20 euros in interest income every year and 1,000 euros back when the loan expires.
Market rate (current yield): Describes the annual return. When the price of the loan paper falls, the market interest rate rises, when the price rises, the interest rate falls.
Why? An investor buys a 1,000 euro bond with an annual coupon rate of 2.0 percent. The market interest rate is (20/1000) 2.0 percent. The investor sells the loan to another investor for 1100 euros, which means the price goes up. The yield level of the loan is lower for the new owner, because he bought the loan at a higher price, but receives the same annual coupon rate as the previous owner. The new market rate is (20/1100) approximately 1.8 percent.
Interest rate: Central banks control the interest rate. At low interest rates, governments and companies offer low coupon rates, so when the interest rate rises, the coupon rates of old loans do not seem as attractive because new loans start offering higher coupon rates. Inflation expectations have a big impact on long-term loans.
The interest rate market is thinking about the future
On Friday, the market interest rate for the two-year US government bond was at a slightly higher level than at the beginning of the week: 3.6 percent compared to 3.5 percent.
When market interest rates on loans rise, their prices fall. The interest point is 0.01 percentage points. Today, the market rate was 2.4 percentage points higher compared to yesterday’s decision.
Decreases in central banks’ interest rates affect loans in such a way that their prices fall. Loans issued in the future may be more attractive than loans issued at the old interest rate.
After the Fed cut rates on Wednesday, market rates fell modestly. However, the direction changed when the head of the Fed Jerome Powell had held a press conference that the Fed would not adopt 0.50 percentage point declines.
“Probabilities of a 0.25 and 0.50 percentage point rate cut are equal at the Fed’s November meeting”, RBC Bluebay Asset Managementin investment manager Mark Dowding commented the news agency Bloombergille.
The market rate for the US ten-year bond was 2.1 percentage points higher today at 3.732 percent. From the beginning of the week, the market rate was around 3.64 percent.
Source: www.arvopaperi.fi
