This week
Markets kicked off the week in a skittish mood as they continued to digest and assess the ramifications of Silicon Valley Bank’s (SVB) collapse. European equity markets felt the brunt of this, ending Monday down -2.5% to -4% depending on the market. It was a traditional risk-off market reaction, with government bond yields shifting materially lower.
Arguably the most significant shift came from the market’s interest rate expectations for the Federal Reserve (Fed). As recently as the 8th of March the terminal rate (i.e. peak interest rate) was priced at close to 5.7%, fast-forward to the 13th March and this had plummeted to 4.75%.
Considering these moves were instigated by the failure of a regional, individual bank you could be forgiven for thinking it seems like an overreaction – especially as President Joe Biden spoke on Monday to state all depositors would be fully protected. But with the severity with which the Fed have been raising interest rates to tame inflation, there is the bearish belief that they will continue doing so until something in the system breaks. SVB may not be that moment, but understandably concerns about the economic outlook has deteriorated.
The shifts in interest rate expectations are driven in part by uncertainty. Indeed, the Federal Open Market Committee (FOMC) next week will provide some much-needed insight into how the central bank is thinking about recent events and their impact on monetary policy.
It was banking issues this side of the pond later in the week that added to risk-off sentiment, as Credit Suisse’s share price plunged as much as 30% on Wednesday. The Swiss National Bank (SNB) stepped in to lend $54bn to boost liquidity and reassure investors, which had the desired effect of calming markets.
The European Central Bank (ECB) has been the first central bank to meet since the turmoil. It raised rates by 0.50% on Thursday, having stated at their last meeting that they intended to raise by 0.50% next time. Despite this, it was a relatively dovish event, removing previous guidance that they expected to raise rates further and instead will be data dependent.
The only other central bank information we received was the Bank of Japan’s (BoJ) minutes from their latest meeting. The minutes provided little new information, but it is worth noting that it was the last one with Kuroda as the BoJ Governor. Kazuo Ueda, a 71-year-old economist, is taking over the mantle. Markets will be keen to hear more about his thoughts on their yield curve control policy that is anchoring Japanese yields – loosening this unorthodox policy could see renewed upward pressure on both Japanese and global yields.
With all the above going on, it's easy to forget that there was important economic data released last week. In the US we received both CPI and PPI for February, which gave us the latest insight into inflationary pressures in the world’s largest economy. The CPI report provided little surprise, numbers broadly in line with forecast, with inflation continuing to fall – headline CPI fell from 6.4% to 6.0%. PPI, however, came in significantly lower than consensus, indicating cost pressures may be easing further.
Prior to the Spring Budget, we received the latest look into the health of the UK labour market, including the ever-important unemployment rate and wage growth readings. Wage growth was a touch softer than expected, balanced out by the unemployment rate unexpectedly sticking at 3.7% - forecasts were for it to rise to 3.8%.
Sticking with the UK labour market, this was indeed where the Chancellor focused much of his attention in the Spring Budget. The plan is to get new parents back into the workforce sooner by increasing early childcare support and get people to stay in the workforce for longer by scrapping the pension lifetime allowance altogether. The latter has proven controversial, with serious question marks over its effectiveness. Unsurprisingly, Labour opposes this policy and have pledged to reverse the plans if they win power.
Next week
Headline events come in the form of central bank meetings in the US and UK. The Federal Open Market Committee (FOMC) meet on Wednesday, with the market forecasting a 0.25% hike in interest rates at the time of writing. There’s clearly uncertainty about this, with a real possibility they might leave rates unchanged. Where the market will focus just as intently on, however, is what Jay Powell says regarding the future path of rates. With such a substantial re-pricing within markets, we expect a pick-up in volatility around the Bank’s meeting.
Market expectations for the Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting on Thursday are also in the balance, with a consensus 0.25% hike but don’t be surprised if they pause at this meeting either, despite headline CPI still stubbornly in double-figures at 10.1%. Many commentators feel the BoE continue to remain behind the curve and should be hiking further than forecast, but it’s important to remember that the UK economy arguably has higher sensitivity to changes in interest rates than the US, for example. This is particularly the case when it comes to the housing market due to much shorter-term nature of UK fixed mortgages.
Helpfully for the MPC, the day before they meet the latest UK inflation report is released for February, covering CPI, RPI and PPI as we see the size of inflationary pressures placed on consumers. On Friday we also see how these pressures are impacting consumer spending habits, with February’s retail sales released. A reminder that consumer spending in the UK contributes around two-thirds to GDP, so retail sales is a crucial datapoint to analyse.
Friday is also the day of Purchasing Manager Indices (PMIs) to give us insight into the health and sentiment of the services and manufacturing sectors. Preliminary March PMIs are released for the US, UK, and Eurozone. All three have recovered in recent months to post levels above the 50-mark, indicating growth.
Whilst we eagerly, and cautiously, await all the above, there is guaranteed good news this weekend. With it being the last Sunday of March, we welcome British Summer Time as the clocks go forward 1 hour, giving us back our much-missed lighter evenings.
The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used, you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 17 March 2023.