Week ending 5th May 2023.

Global equity markets had a mixed week thanks to tug-of-war between the prospect that interest rates are close to their peak levels on one side and recession worries on the other.

The Fed delivered exactly what we were expecting on Wednesday (3 May 2023), when they announced that US interest rates would increase by a further 0.25% and that policymakers were moving to a data-dependent stance going forward.

While in theory this leaves the door open for further interest rate increases, should circumstances dictate, the Fed statement does suggest that this is more likely to be the end of this interest rate cycle as policymakers finally acknowledged what we have been arguing for some months: policymakers need to take into account the fact that their interest rate increases over the past year take time to fully feed through to economic activity, inflation and financial conditions.

Unfortunately, while the Fed’s statement was exactly what we were expecting, the accompanying press conference with the Fed Chair, Jay Powell, wasn’t, as he pushed back on the suggestion that interest rates could be cut before the end of the year as he would like to see interest rates remain high for as long as inflation remains above the Fed’s 2% target.

We remain highly sceptical that interest rates can remain at these levels given economic data has softened, coupled with the fragility of the US banking sector, which as we have previously stated, is likely to result in banks tightening their lending requirements as they will want to build-up their liquidity – and less lending will, at the very least, slow the global economy.

Elsewhere, Eurozone core CPI inflation slowed from 5.7% in March to 5.6% in April – its first decline in nearly a year.

Unfortunately, that didn’t stop the ECB increasing Eurozone interest rates by a further 0.25% yesterday (Thursday 4 May 2023) – although it does back the case for the ECB to start slowing or pausing its interest rate campaign.

Next week we have a BoE monetary policy meeting, along with US & Chinese CPI inflation; UK Q1 GDP; UK industrial production; and the University of Michigan Consumer Sentiment index.

Investment Management Team