Comments from Federal Reserve (Fed) Chairman Jerome Powell prompted a sharp market retreat last week as investors assessed the possibility of an acceleration in interest rate hikes over the coming months. Testifying before the US Congress, Powell signalled that the Fed was prepared to ramp up the pace of its monetary tightening in the face of stickier inflation and labour market tightness[1], the latter being confirmed by another expectation beating month of payrolls growth during February[2].
Later in the week, concerns relating to the health of Silicon Valley Bank (SVB) added to the market decline, its shares being suspended on Friday after customers rapidly sought to withdraw deposits; the bank later collapsed with the Federal Reserve Deposit Insurance Corporation placing it into receivership[3]. The S&P concluded the week -4.6% lower with nearly all of its 2023 gains now lost whilst the 10-year US Treasury yield retreated by 27 basis points (bps) to 3.69% as investors sought safety as the SVB situation unfolded.
The fallout from Powell’s testimony and the SVB debacle was felt across equity markets with European indices finishing the week sharply lower. The MSCI Europe ex UK index declined by -2.2% whilst across the Channel, the FTSE100 and FTSE250 fell by -2.5% and -2.9% respectively. Gilt yields declined across the curve meanwhile, the 10-year security dropping to 3.64% after a weekly decline of 21bps. Moving to Asia, the Shanghai Composite fell by -3.0% after the Chinese Government announced a +5.0% economic growth target for this year which fell short of market expectations. As for Japanese equities, the Nikkei 225 bucked the negative trend seen elsewhere with a weekly gain of +0.8%.
In the commodities world, oil was another casualty of Powell’s hawkish tone with Brent crude falling by -3.7% to $83 a barrel, reflective of increased expectations of a recession later in the year. Copper also slipped on future demand concerns, the metal edging -1.2% lower to $8,847 a tonne. Data released earlier in the week showed a significant decline in Chinese copper imports during the first two months of the year.[4]
Week Ahead
CPI inflation is amongst the standout figures released in the US this week with the headline index expected to have slowed to 6.0% last month, a 40bps reduction on January’s level if accurate. Retail sales, industrial production and a slew of data relating to the housing sector are also released as the week progresses. In the UK, Wednesday’s budget announcement from the Chancellor is likely to receive plenty of attention with unemployment the only figure of note due this week. Meanwhile in the Eurozone, the European Central Bank (ECB) hosts its latest monetary policy meeting on Thursday with its base interest rate expected to be lifted by an additional 50bps as it continues its attempts to rein in inflation. Wednesday is a busy day for Chinese data releases with industrial production, retail sales and unemployment figures all published during the early hours. There are no significant macro figures due from Japan on this occasion.[5]
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[1] The Federal Reserve, 13/03/23
[2] Bureau of Labor Statistics, 13/03/23
[3] T. Rowe Price, 13/03/23
[4] Refinitiv, 13/03/23
[5] Forex Factory, 13/03/23
SJP Approved 13/03/23