.jpg)
As expected, the US Federal Reserve and the Bank of England both increased their interest rates by 0.25% this week and spoke firmly about their confidence in the strength of the banking sector. By continuing with their rate rise policy amid sticky inflationary data they are adding evidence to their view that the banking system has been brought into focus due to poor management of a few isolated banks, rather than a more systemic problem. The central banks have wanted to cool inflation in an orderly manner by raising interest rates, yet a disorderly slowdown may instead force their hand in the coming months if there are any further issues in the banking sector.
What a rollercoaster the macro environment has been on so far in 2023. Starting with nailed on recession fears in the first few weeks of January, moving onto a very mild recession expectation (soft-landing) optimism, then a “no landing” consensus meaning continued growth recovery (mid-February - early March), straight into the fears of a banking crisis in the US and Europe about 10 days back. Can we now move to modest optimism that the banking crisis is contained to a few idiosyncratic institutions? Time will tell and arguments can be made for both sides of this debate currently.
The pressure on the Bank of England to continue with the rise in rates was exacerbated on Wednesday with news that UK inflation had actually risen from 10.1% to 10.4%, mainly as a result of domestic pressures such as food and drinks, rather than external energy price shocks. Then today we saw retail sales in the UK rising for the second month in a row, by 1.2%, while consumer confidence had increased, according to the research group GfK. UK Core inflation is now 0.7% higher than in the US, having broadly mirrored it through 2022, despite the Bank of England raising rates for the 11th consecutive time since November 2021, taking the base rate from 0.1% to 4.25% in the process.
Listening intently to the wording of US Federal Reserve Chairman Jerome Powell has become something of an industry addiction over the last year and he did not disappoint on Wednesday with a focus on his use of the words “some additional policy firming may be required” to suggest the end of the tightening from the central bank is near. Markets appear to be desperately waiting for some direction and perhaps the next US Federal Reserve meeting at the start of May will provide it.
Wherever you may be, I do hope you enjoy your weekend.
Comments