Investors See Fed Rate Increase in May, U.K. to Report Inflation This Week
Last Week Review
Global equities rose 1.3% last week, despite late-week weakness coinciding with a rise in interest rates. Lower inflation and economic growth expectations encouraged investors, who likely are seeing an improving case for a pause on central-bank rate hikes. U.S. interest rates were stable through last Wednesday before a late-week push increased the two- and 10-year Treasury yields 12 basis points each for the week.
Investors See Higher Chance of 0.25% Rate Hike at Next Fed Meeting
Investors last Monday raised their expectations of a 0.25% rate hike at the Federal Reserve’s May meeting to about a 70% chance from 50%, based on futures trading. That rose to about 80% by the end of the week. The Monday move came after a better-than-expected March U.S. jobs report released at the end of the previous week, when trading was light because of the holidays. Still, investors heard cautious statements on economic growth last week. The International Monetary Fund lowered its global growth forecasts, while Fed meeting minutes noted that its staff is now forecasting a mild recession given banking-sector developments. Nonetheless, judging by recent public comments from central bank members, there still appears to be enough appetite for the Fed to hike another 0.25% because of continued inflation.
Inflation Trends Down, But Core Inflation Sticky
U.S. inflation in March eased below expectations to 5% year-over-year from 6% in February, based on the Consumer Price Index. Inflation rose 0.1% in March from February, versus the previous 0.4% month-to-month increase. Core inflation, which excludes more volatile energy and food prices, rose 5.6% year-over-year in March from 5.5% in February, while rising 0.4% month-to-month. Core services ex-housing, which is a focus of the Fed, slightly moderated and shelter prices decelerated. However, core goods prices ticked up a bit. While inflation has followed a moderating trend, core prices remain uncomfortably high. As such, investors maintained their expectations for a 0.25% rate hike by the Fed in May.
Large U.S. Bank Profits Strong During Tense First Quarter
JPMorgan (JPM), Citi ( C ) and Wells Fargo (WFC) exceeded earnings expectations, with JPMorgan a clear beneficiary of deposit inflows. Larger banks have notably outperformed regional banks since the Silicon Valley Bank collapse in March that sparked banking-sector turmoil. Concerns on broader banking contagion have come off the boil with little new developments and a decline in the use of central bank emergency lending facilities. For the first quarter, aggregate earnings of companies in the S&P 500 Index are expected to fall about 6% year-over-year on a rise in sales of about 2%.
This Week Preview
Global Purchasing Managers Index Reports on Friday, China to Report Economic Indicators
Flash Purchasing Managers’ Index reports are scheduled for release for the U.S., Europe and the U.K. on Friday. Manufacturing for all three countries is expected to remain in contractionary territory while services are expected to remain expansionary. Early in the week, China is scheduled to report on industrial production, fixed assets investment and retail sales. China’s trade data last week surpassed expectations, but other economic indicators have not been as promising.
U.K. and Japan to Report Inflation
U.K. inflation, scheduled for release on Wednesday, is expected to ease but remain very high at 9.8% year-over-year. Japan’s inflation, scheduled for release on Thursday, is expected to remain tame at 3.2%. With monetary policy, key events this week include the release of the Fed Beige Book and minutes from the European Central Bank’s March meeting.
Johnson & Johnson, Union Pacific and More U.S. Banks to Report Earnings
Johnson & Johnson (JNJ), Bank of America (BAC) and Goldman Sachs (GS) are scheduled to release earnings on Tuesday. Union Pacific (UNP) will follow on Thursday, with Procter & Gamble (PG) and Schlumberger (SLB) closing the week out on Friday. Investors will likely turn to commentary from banks for an update on the economic conditions and consumer health.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of April 16, 2023.
See our latest insights and research.
IMPORTANT INFORMATION. For Asia-Pacific markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. Information is subject to change based on market or other conditions.
Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Past performance is no guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by Northern Trust. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. Investment management/advisory fees are described in Northern Trust Investments, Inc. Form ADV Part 2A.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.
P-041423–2847572–041324