Fed Tightens Again With Hiking Cycle Approaching Its Conclusion

The Federal Reserve (Fed) raised interest rates for a tenth consecutive policy meeting last week in what may have been the final round of tightening in this rate hiking cycle. Its base rate was lifted by 25 basis points (bps) to a range of 5.00-5.25%, with the Central Bank having boosted rates by 5 full percentage points since March last year. Fed Chairman Jerome Powell noted that we may have reached the end of rate increases although that unsurprisingly came with the caveat that the Bank remains prepared to do more if necessary given the apparent stubbornness of underlying inflation. The Fed added that tighter credit conditions for households and businesses will continue to weigh on economic activity over the coming months although currently, the banking system remains “sound and resilient”[1] despite the recent failures of SVB, Signature and First Republic. Treasury yields inched higher with the closely monitored 10-year security rising by 9bps to 3.516%.

Equity market performance was mixed with sentiment also impacted by growing concerns relating to the US debt ceiling. The S&P500 declined by -0.8% with significant volatility continuing to impact the underlying banking sector. In Europe, the MSCI Europe ex UK index fell by -0.2% whilst across the Channel, the FTSE100 retreated by -1.2%. Meanwhile in Asia, the Japanese Nikkei 225 continued to grind higher (+1.0%) in what was a holiday shortened week due to the Gold Week national festivities. The Shanghai Composite rose by +0.3% despite the release of weak manufacturing sector data.

Moving to commodities, oil prices maintained their recent downwards path with Brent Crude falling by -5.3% to $75.30 a barrel. Weakening global economic output and the growing issues in the banking sector have both weighed heavily on demand expectations with prices now having slipped for three straight weeks. Gold, which tends to benefit when there are concerns about the health of the economy, rose by +1.1% with the precious metal concluding the week at $2,012 an ounce[2].

Week Ahead

It’s a busy week of macro activity in the UK this week with all eyes firmly on the Bank of England (BoE) ahead of its policy meeting on Thursday. Following on from the Fed and the ECB last week, the BoE is also expected to lift interest rates again, this time by an additional 25bps to 4.50%. In terms of data, revised first quarter GDP is published on Friday with the economy expected to have expanded by +0.1% versus the final three months of 2022. As for the US, the key data release arrives on Wednesday in the form of CPI inflation with the headline index forecast to have remained unchanged at 5.0% last month. Producer inflation follows a day later. CPI data is also released in China this week with inflation expected to have continued on its downwards path during April (forecast 0.3% versus 0.7% previously). There are no major data publications from the Eurozone and Japan on this occasion[3].

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[1] Federal Reserve, 09/05/23

[2] Refinitiv, 09/05/23

[3] Forex Factory, 09/05/23

SJP Approved 09/05/23