Week ending 16th June 2023.

As you can see from the accompanying table markets ended the week higher.

As widely anticipated the Federal Reserve paused interest rate hikes this week. Policymakers met expectations by keeping interest rates unchanged at 5.00-5.25%. Due to long and variable lags associated with monetary policy, we view this as an opportunity for the Fed to take time to assess economic data given the downward trajectory of inflation and signs of a softening economy.

The Fed surprised markets slightly by increasing the terminal rate in the Dot Plot by 50 basis points. The decision was unanimous among the members of the Federal Open Market Committee (FOMC), indicating a more balanced approach. The growth forecast for 2023 was raised to 1% from 0.4% in March, whilst the unemployment forecast was lowered to 4.1% compared to the previous estimate of 4.5%. The pause was made to allow the committee to gather more information and evaluate its implications for monetary policy. During the press conference, Fed Chair Jay Powell emphasised that the final decision for July will depend on the incoming data.

The recent stock market rally gained momentum, partly due to the expectation of a less aggressive stance from the Fed. Whilst we don’t foresee a complete reversal of the recent gains, it is important for investors to expect fluctuations in markets particularly surrounding the Fed’s actions and incoming economic data. However, as investment managers, we view these events as opportunities to capitalise on the dips in the market and actively adjust our portfolios.

In contrast with policymakers in the US, the European Central Bank (ECB) implemented a 25-basis point rates rise, raising the deposit rate to 3.5%. Alongside this decision, the ECB revised its inflation projections upward whilst lowering its growth forecast. Markets appeared to shrug off hawkish signals from the central bank as ECB President Christine Lagarde indicated that another rate hike in July is likely unless there is a significant change in the economic data.

On Friday, the Bank of Japan (BoJ) maintained its existing policies. The central bank acknowledged the economy’s recovery but projected a slowdown in core consumer inflation by the middle of the fiscal year. BoJ Governor Kazuo Ueda later commented that Japan’s inflation is not sustainable, and more time is required to achieve the 2% inflation target. He also mentioned the potential negative impacts from US rate hikes that could emerge later, including the possibility of an economic downturn.

Looking to next week’s data releases, UK inflation data is due on Wednesday 21 June. Markets are expecting the annual rate of inflation to cool slightly from 8.7% to 8.4%. The Bank of England remains hawkish and is expected to raise interest rates by 25 basis points on the Thursday 22 June, which will take rates to 4.75%. Also due next week are Fed chair Powell’s Testimony, US initial jobless claims, Japanese CPI, UK retail sales and consumer confidence

Kate Mimnagh, Portfolio Economist