- Weekly update
- 5 minute read
A good week for
- Japanese equities rose in sterling terms, flattered by yen strength
- Gold gained c. 1% in dollar terms
A bad week for
- Equities sold off in sterling terms in the UK, Europe and the US, hindered by pound strength
- Bonds weakened in the UK and US
US banks continue to face volatility, with concerns lingering as to the health of the US banking sector. US regulations have a two-tier approach, with larger banks facing stricter rules than small banks. Coupled with smaller banks’ more limited ability to absorb significant deposit flight, this has led to depositors moving cash out of these banks. This could lead to some banks breaching regulatory capital requirements. US bank First Republic saw its share price fall, and eventually required rescuing, after depositors withdrew more than $100bn. Other banks are also under pressure, with PacWest reporting that its deposits shrunk 16% from the end of December 2022 to the end of March this year. While more bank failures are possible, bank funding structures have changed significantly since the global financial crisis. Crucially, banks are less dependent on each other, with interbank lending having fallen by two thirds since the crisis.
The US Federal Reserve went ahead with a further rate rise last week, despite signs of tightening credit conditions. The Federal Reserve’s Open Market Committee (FOMC) raised interest rates by 0.25% to 5.25%, but toned down the hawkishness of forward guidance. The statement no longer says that “the committee anticipates that some additional firming may be appropriate”, instead adopting a data-dependant approach. This in part reflects the expectation that credit conditions will tighten, and that this is likely to weigh on the economy, as was alluded to in the statement and in the press conference, when Fed chair Jerome Powell acknowledged that tightening credit will require fewer rate increases than would otherwise have been required. However, Powell also emphasised the Fed’s belief that rates will remain high for longer. In contrast to market based measures, which indicate rates ending the year around 1% lower, the Fed’s own forecasts see no cuts this year.
US labour market
The strength of Friday’s labour report perhaps explain why the Fed went ahead with a further rate rise. Unemployment fell to 3.4% from 3.5%, against a backdrop of flat labour participation, while the number of payroll employees rose by a strong 253,000. While downward revisions to prior monthly print meant that employment is lower than previously thought, the employment landscape remains strong. Wage growth also accelerated on a month-on-month basis to 0.5% from 0.3% in March. The Job Openings and Labour Turnover report painted a slightly softer picture, with the jobs-to-unemployed worker ratio easing to 1.6x from 2x in December. The number of layoffs also rose, and voluntary job quits and new job openings declined. The labour market is expected to ease further this year, with negative growth expected in Q3 and Q4.
European central bank
The European Central Bank also raised rates last week, increasing the main refinancing rate by 0.25% to 3.75%. The ECB’s Governing Council also agreed that in July, maturing assets held in the Asset Purchase Programme will no longer be reinvested. This will effectively increase the pace at which the balance sheet assets shrink, in the “passive” phase of quantitative tightening. In contrast to the Fed, the ECB statement remained hawkish, pledging that future decisions will ensure that the policy rates “will be brought to levels sufficiently restrictive” to achieve price stability. In her statement, ECB President Lagarde confirmed that “we are not pausing”…“we know that we have more ground to cover.” While European inflation is expected to fall rapidly this year, GDP forecasts have been upgraded significantly, increasing the likelihood that some inflationary pressure could remain for longer.
Last week’s local election provided an early sign as to how the UK’s main political parties can expect to fare at the next general election, to take place before January 2025. The Conservatives, who won a good number of councils in the last elections, were expected to face losses, though not as many came to pass. The Conservatives lost control of almost fifty councils and 1000 seats. Labour gained more than 500 seats, and more than 20 councils, with the Liberal Democrats gaining more than 10 councils. In a national election, the Liberal Democrats are expected to do less well than in the local elections, with the Labour party expected to benefit.
The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.