Market Commentary 6th February 2023 from Charlie Hancock

The BoE’s monetary policy committee voted to raise interest rates by 0.50%, which was widely expected by investors. The hike lifted the base rate to 4.00%, a level not seen since Autumn 2008.

The BoE said that a potential recession is likely to be “much shallower” than their previous forecast released in November 2022, with declining energy prices softening the expected blow. These comments were followed by a warning from the bank’s chief economist, Huw Pill, who said that the central bank must guard against the possibility of “doing too much” with regard to interest rate rises.

January’s Eurozone Consumer Price Index (CPI) data showed the headline rate of inflation slowed by more than expected, with prices increasing at 8.5% year-on-year. The core measure of inflation, which strips out food and energy costs, remained at the previous high of 5.2%, suggesting that inflationary pressures remain broad across the Eurozone economy.

The European Central Bank (ECB) raised interest rates by 0.50%, bringing their key deposit rate to 2.50%. The ECB signalled that a further hike of 0.50% is likely next month. The central bank’s President, Christine Lagarde, warned that inflation is still “far too high” and that the anticipated hike in March would not be the last.

The market shrugged off weak earnings reports posted by US technology companies. Alphabet, the parent company of Google, missed revenue and profit forecasts for the 4^th quarter of 2022. Apple posted a year-on-year decline in revenue and profits came in lower than expected. The share prices for the Tech giants rose by 5.44% and 5.87% respectively across the week.

The Federal Reserve raised interest rates by 0.25%, with chairman Jerome Powell stating that it appears the disinflationary process has started. The market appeared to interpret the comment as confirmation that the Fed will stop hiking interest rates in the near future.

Economic data released on Friday cast doubt on expectations of the Fed pausing imminently, with the data suggesting that the US economy remains strong. A Purchasing Managers’ Index (PMI) for the services sector moved back into expansionary territory in January. In addition, January’s non-farm payroll report showed the US economy added 517,000 jobs during the month, well ahead of economist estimates for 185,000 new roles.

US-China tensions flared up again last week, with speculation that China had sent a ‘spy balloon’ to US skies. Chinese authorities claimed the balloon was a weather monitoring device which had been blown off course. The US shot down the balloon on Sunday. Reports suggested that the US are considering banning US companies and individuals from investing in Chinese technology firms, along with ordering US suppliers to avoid doing business with Chinese tech giant Huawei.

Key individuals at the Bank of Japan (BoJ) commented that they expect wage increases to accelerate in the coming months. The central bank’s governor, Haruhiko Kuroda, said that he expects labour market conditions to tighten further, but made no suggestion of their monetary policy changing as a result. Investors are likely to keep a close eye on the potential candidates to succeed Kuroda when his tenure finishes in April, given the potential for a new governor to shift the direction of policy. The central bank is expected to present nominees to parliament later this month.

Comments from Fed chair Jerome Powell, which were interpreted as relatively dovish, appeared to contribute to yields declining during the middle of the week. Friday’s strong economic data appeared to be the main driver of yields moving higher again on Friday.

GBP / EUR – Current 1.1165 Previous 1.1399

The Pound declined by 2.63% against the US Dollar last week, with the greenback reversing some of  the recent weakness against most major currencies. Against the Euro, Sterling fell by 2.05%, with hawkish comments from the ECB appearing to support the Eurozone currency.