Market Update – 22nd March 2023.

22nd March 2023

Stocks clawed back their losses this week and markets returned to a sense of calm on Monday as investors digested the takeover by UBS, Switzerland’s largest banking institution, of its struggling competitor, Credit Suisse, in a rescue agreement designed to halt financial market contagion risks, which were triggered by the bankruptcy of two US banks a couple of weeks ago. US Treasury Secretary Janet Yellen signalled more help could be on the way but said ‘the situation is stabilising’ and that ‘the US banking system remains sound’.

Some much-needed confidence has been restored to the banking sector after the turmoil of recent days as regulators rushed to shore up the global banking system.

Investors’ focus soon shifted to the monetary policy meetings being held by the Federal Reserve and the Bank of England this week.

As expected, the European Central Bank raised interest rates by 50 basis points last week, despite the commotion in the banking sector.

As we have mentioned previously, we are now starting to see the implications of a rapid rate rise cycle on both the banking sector and the wider economy. With concerns mounting over the health of the banking system complicating central banks’ focus on inflation, some in the market are expecting central banks to potentially abandon rate rises altogether this week, suggesting policymakers should take a break to evaluate the extent to which financial instability will restrict lending and dampen demand.

With that being said markets have priced in a 25-basis point move by the Fed later today, (22nd March), down from previous predictions a couple of weeks ago of a 50 basis point hike. Recent CPI data has continued to demonstrate inflationary pressures in the US are easing, with the annual inflation rate slowing to 6% in February of 2023, the lowest since September of 2021.

The Bank of England will make their interest rate decision on Thursday (23rd March). Markets have also priced in a 25 basis point rise, however, hotter-than-expected inflation figures released this morning may alter these bets as prices unexpectedly increased in February 2023, breaking three consecutive months of slowing prices. The annual inflation rate edged higher to 10.4% up from 10.1% in January 2023, and greater than market forecasts of 9.9%. Prices were led higher by rising alcohol prices in pubs and restaurants following discounting in January.

There was some positive data which showed producer prices in the UK are still falling primarily thanks to fall in wholesale gas prices and the cost of other commodities. On a monthly basis, producer input prices decreased by 0.1% and output prices decrease by 0.3% in February 2023.

Elsewhere, China’s President, Xi Jinping, has been trying his hand at peace talks with Russian President, Vladimir Putin, just weeks after brokering a historic truce between Iran and Saudi Arabia.

Xi’s Moscow trip comes after China published a 12-point plan for “a political resolution of the Ukraine crisis”. However, the US and NATO discredited China’s efforts at mediation as Beijing has refrained from condemning Russia’s invasion. Putin says Russia and China will develop ties in finance, transport, and logistics areas, as well as energy.

The main aim of the trip does appear to tactical in terms of developing the countries ties in finance, transport, and logistics area, as well as energy.

Still to come this week we have Japanese CPI inflation, US Durable goods orders. US, UK, Eurozone & Japanese PMI.

Kate Mimnagh, Portfolio Economist