Central Banks Maintain Tightening Path Despite Banking Sector Turmoil

The Federal Reserve (Fed) and the Bank of England (BoE) followed the European Central Bank (ECB) in hiking interest rates last week with the threat of sticky inflation outweighing growing concerns relating to the banking sector. The collapse of Silicon Valley Bank and the rapid acquisition of embattled Credit Suisse by rival UBS had led to some growing expectations that the central banks may refrain from lifting rates again although this ultimately proved not to be the case. The Fed raised rates for a ninth consecutive month[1] with the BoE pushing through an 11th straight hike[2], the latter opting for a 25 basis point (bp) move despite a surprise rise in CPI inflation which jumped to 10.4% last month on the back of surging food prices[3]. Sovereign yields were little moved, the 10-year UK gilt ending the week unchanged at 3.28% whilst the equivalent duration US treasury yield fell by 50bps to 3.38%.

With the central bank meetings and ongoing weakness in the banking sector serving as a backdrop, volatility continued to grip equity markets last week although most of the major indices managed to recover some lost ground. The S&P500 rose by +1.4% with strong gains in the technology sector offsetting further weakness in financials. On the Continent, the MSCI Europe ex UK index rose by +1.0%, a figure matched by the FTSE100 with the mid-cap focused FTSE250 adding a modest +0.1%. In Japan, the Nikkei 225 added 20bps despite core inflation slowing meaningfully from 4.2% to 3.1% last month[4] whilst in China, the Shanghai Composite rose by +0.5%.

Moving to commodities, oil prices recorded a weekly gain despite growing demand concerns. Brent crude added +3.6% to $75 a barrel even after a sharp retracement on Friday although only partly recovering the near -12.0% loss endured during the prior week. Gold prices continued to press higher, the precious metal adding a further +1.6% to $1,993 an ounce whilst copper rose by +4.0% to $8,912 a tonne. Copper has been the best performing industrial metal this year thanks to a jump in demand expectations from China as its post COVID economic recovery accelerates.[5]

Week Ahead

Final Q4’22 GDP figures are due from both the UK and the US this week although no changes are expected to be made to the previously calculated numbers (a flat quarter for the UK, +2.7% growth for the US). Elsewhere in the UK, the Bank of England releases its monthly consumer borrowing statistics which covers off mortgage approvals and credit card lending. Other US figures to keep an eye on include pending home sales and the key consumer sentiment gauge from the University of Michigan. In the Eurozone, CPI inflation and unemployment are published on Friday with the former expected to have dropped by 140bps last month to 7.1%. German retail sales are due on the same day. Unemployment figures are also published in Japan this week alongside industrial production and retail sales. As for China, March’s official PMI numbers for both the manufacturing and services sectors are due during the early hours of Friday morning. [6]

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[1] Federal Reserve, 27/03/23

[2] Bank of England, 27/03/23

[3] Office for National Statistics, 27/03/23

[4] Statistics Bureau of Japan, 27/03/23

[5] Refinitiv, 27/03/23

[6] Forex Factory, 27/03/23

SJP Approved 27/03/23