Yesterday, market sentiment homed in on weaker-than-expected US economic data which fuelled recessionary fears. For example, on Tuesday we saw a softer-than-expected Factory Orders print which hit -0.7% against expectations of a -0.5% figure. Meanwhile, the JOLTS figure came in at 9.93m against expectation of 10.4m indicating that a slowdown in the US labour market with less job openings and softer demand for labour. Indeed, this was the first time the JOLTS figure came in below 10m since 2021, as markets weigh on whether the heat of the US labour market may be cooling, as wider economic activity slows.
In the US, this saw the S&P 500 lose 0.58%, while the Dow Jones lost more or less the same closing 0.59% lower. Meanwhile the teach heavy Nasdaq lost just over half a percent following Monday’s close which saw the index shed a quarter-of-a-percent.
This morning, the Reserve Bank of New Zealand unexpectedly raised rates by 50bpts brining the base rate to 5.25% – its highest level since late 2008. This marked the 11th consecutive rate hike and is the 500th bp increase since October 2021. The RBNZ’s hike comes as inflation in Q4 2022 stood at 7.2%, just below a recent peak of 7.3% in Q2 2022, well above their target of 1-3% rate. The CB noted that “Inflation is still too high and persistent, and employment is beyond its maximum sustainable levels”.
According to Reuters, “Kiwibank along with ANZ, Bank of New Zealand, ASB Bank and Capital Economics now expect the cash rate to peak at 5.5%”
Yesterday, the Fed’s Loretta J. Mester – president and CEO of the Federal Reserve Bank of Cleveland – said that the monetary conditions will need to stay tight in order to cool inflation and that rates may need to stay above 5% for an extended period of time. Mester said that she sees inflation at around 3.75% by the year’s end and 2% by 2025 with growth in the US being marginal this year. Mester said that she sees the Fed’s monetary policy “somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time.”
Mester also discussed the banking sector’s resilience in the wake of SVB’s collapse and the fragility with Credit Suisse. Here, she said that they are closely monitoring the banking sector in light of the stresses that rate hikes are causing on some bank’s balance sheet.
Given the correlation between the effects that rising interest rates have had on banks’ balance sheets and recent bank failures, central banks were brought face-to-face with a fragile trade-off. Namely, opting for further monetary tightening to combat inflation on the one hand while not wanting to put further stress on banks’ balance sheets on the other. Indeed, as The Economist notes “at the end of 2022 there were $620bn of unrealised securities losses on banks’ books”, though with inflation continuing to cause persistent headaches for central banks, policy makers still opted to raise rates across the board, though in a softer manor.
While Mester does not have a vote on the Federal Open Market Committee, her remarks are indicative of those on the more hawkish side.
Today will see market attention chiefly focused on S&P PMI figures which are released from around the globe throughout the day. In the UK, the composite figure is expected to come in at 52.2pts – the same figure as last month’s print, indicating a marginal rise in activity. The Eurozone is expected to deliver a stronger print at 55.6pts for their services PMI print, while the US is expecting to see a figure of 54.5pts following softer-than-expected economic data yesterday. Markets are also expecting to see a ADP employment change of 200,000 against last month’s 242,000 as investors weigh on the heat of the US labour market.
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