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Weekly Market Update: Global Stocks Rise on Response to Banking Concerns, Inflation Reports Set for Europe and U.S. This Week
Last Week Review
Global equities rose 1.5% last week as policymakers responded to contain the fallout from the collapse of Silicon Valley Bank. Developed market stocks outside the U.S. rose 2.1%, emerging markets equities gained 1.4% and U.S. stocks rose 1.3%. The two-year Treasury yield declined 0.07% to 3.77% while the 10-year yield declined 0.05% to 3.38%. With the banking stress, futures are showing that investors expect the Fed to cut rates, which has depressed short-term yields. The difference between the two-year yield less the 10-year yield has fallen about 0.70% since banking volatility began, significantly reducing the yield curve inversion.
Fed Increases Rate, Sees Bank Stability
The Fed hiked its policy rate by 0.25% to a 5% upper target and signaled that it believes the banking system remains stable. The Fed also noted the likelihood of recent stress leading to tighter credit conditions that could weigh on economic growth and inflation. While the Fed softened language on future hikes to “some additional policy firming may be appropriate” from “ongoing increases will be appropriate”, Chair Jerome Powell emphasized the tight labor market and strong economic indicators. In its updated Summary of Economic Projections, the median terminal federal funds rate stayed at 5.1% as the Fed projects one more rate hike and no cuts this year. This stands in contrast to market expectations that indicate the Fed is done hiking and may deliver about four cuts this year. The Fed announcements weighed on sentiment, but they coincided with comments from U.S. Treasury Secretary Janet Yellen that walked back reports that the U.S. was exploring ways to guarantee all bank deposits. The government has expressed a desire to contain financial stability risks, but their ability and willingness to proactively guarantee deposits remains unclear.
Bank of England Raises Rate as Inflation Remains Strong
After a report of surprisingly high inflation, the Bank of England raised its key interest rate by 0.25%. They signaled optimism on cooling inflation but may hike again if the data warrants it.
Banks Under Pressure
The UBS rescue of Credit Suisse heading into last week helped temper fears of contagion risk. Still, worries about other banks continued to spur market volatility, as U.S. banks ended the week down about 0.5%.
U.S. Services, Manufacturing Activity Surpasses Expectations, Europe Manufacturing Disappoints
U.S. services in March expanded more than expected, while manufacturing remains in contraction but not as deep as expected, according to the flash Purchasing Managers’ Index for March. Meanwhile, Europe’s manufacturing came in lower than expectations but its services reading was very strong.
This Week Preview
Europe’s Inflation May Fall, But Core Inflation is Key
The preliminary eurozone Consumer Price Index is set for release on Friday. Inflation is expected to decline to 7.1% year-over-year in March from 8.5% in February. Still, we think monetary policymakers won’t find much comfort if year-over-year core inflation increases to 5.7% as expected.
Fed’s Preferred Inflation Measure Set for Release on Friday
February’s Personal Consumption Expenditures Price Index — the Fed’s preferred measure of inflation — is scheduled for release on Friday. The core index, which excludes more volatile food and energy prices, is expected to remain unchanged from 4.7% year-over-year in January.
China’s Economic Indicators May Show Progress After Re-Opening
The progress of China’s economic re-opening will likely garner attention this week with China’s Purchasing Managers’ Index report. The report may indicate a decrease in manufacturing and services activity but still remain consistent with expanding economic activity. While China’s economy has bounced back since the government lifted COVID-19 restrictions, we think investors were expecting a more robust recovery.
Several Fed Members Scheduled to Speak This Week
Fed members may shed additional detail on the Fed’s current line of thinking after last week’s rate increase in the wake of investor concerns on financial stability.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of March 26, 2023.
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