US Interest Rates
The US Federal Reserve did exactly as expected last night, when they raised interest rates by half a percent, the largest move in more than twenty years. With the market fully prepared for such a move, it was always going to be down to the chairman’s statement afterwards to move markets and in this instance, Jerome Powell didn’t disappoint: His view of the world is that there could be more 50 basis point rises in the coming months but poured cold water on the idea of larger hikes, which immediately hit the value of the dollar and US treasuries, as investors had thought there could be an even faster tightening cycle on the cards and with Jay Powell confirming that this is “not something that the committee is actively considering” so some of the strength in the greenback unwound. As well as a half point hike, the FOMC are also going to start the mammoth task of unwinding their balance sheet, by reducing their holdings of government treasuries and mortgage backed securities by $47.5bn per month from June, which they intend to ramp up to $95bn per month over subsequent months – The Fed hold approximately six trillion of government bonds and two trillion dollars of mortgage backed securities, so even at their expected pace of $95bn per month, it will still take around seven years if they want to fully unwind their position – and call us cynical, but we’d fully expect to be back into another crisis by then and for them to have bought some more.The Guardian has more:
US Stock Market
The US stock market liked what it heard from the Fed and put on one of the best trading days for a couple of years – easily done when it’s been pretty gloomy out there for so long and someone gives you some good news to hang onto. Year to date the picture still isn’t great though, with the S&P down 10% and the tech heavy Nasdaq about 19% lower than where it started 2022. Still, Janet Yellen, the current Treasury Secretary and former Fed chair, believes that the central bank has done enough to ensure a ‘soft landing’ and that the US will see solid economic growth this year – though plenty of people disagree and think that a lot of the world is in for a period of stagflation and though the US might just about dodge this scenario, it’s fundamentally still not looking bright – though on a relative basis, in the world of the blind, the one eyed man is King.
Bloomberg has more:
Europe may not be so lucky and its proximity to, and dependence on, Russia is piling on economic strains that don’t seem to be easing with the passing of time, albeit a relatively short period so far. The plans to wind down Russian oil imports within six months announced by Ursula von der Leyen yesterday have already started a bit of a rift, with Hungary objecting to the plan and Slovakia also wanting exemption. This disunity is, to a degree, to be expected but throws another variable Europe’s way in the handling of Putin and trying to put pressure on him whilst also not risking him cutting off gas supplies that would completely cripple the European economy and probably be a bigger threat to the unity of the Union than Brexit and the Greek debt crisis combined. Even without the problems getting worse, Europe’s economy managed just 0.4% growth in the first quarter of this year and is probably heading into negative territory next quarter, meaning they’ll be edging close to a technical recession, and whilst US monetary policy is off to the races, the ECB can only dream of being in a position to act hawkishly to try and control inflation.
Today is a big day in the UK for a couple of reasons: The Bank of England are going to announce any changes to monetary policy and, much like the US the prospect of a rate rise is pretty much baked into the market’s pricing already (though 25bps not 50bps as it was in the US) so it will come down to what we see outside of the headlines – If some of the nine votes want more or less than 0.25% and it’s a split decision, then this will have an impact on the value of Sterling. If Andrew Bailey talks up or down the prospect of future rate rises being larger or smaller than this too will have an impact.
It’s also a big day because it’s the day that the public get the chance to air their views on the government’s performance, by way of voting in council elections: There’s quite a lot of power up for grabs today, with councils across England, Scotland and Wales up for grabs, as well as all of London, and seven mayoralties. The outcome will be a reality check for the current administration, though whether Labour has been able to capitalise on what’s gone on of late is anyone’s guess so we’re making no predictions! The Northern Ireland Assembly is possibly the most interesting of the elections and polls are suggesting that Sinn Fein will become the largest party in Stormont for the first time. There’s an interesting article on what this might mean, here.
Read more here:
That’s about it for today. Markets in Asia haven’t followed on with the enthusiasm we saw in the US and outside of the BoE today, we’ll be looking at some US jobs numbers to get a sense of just how overly-full their employment market is and try and understand what that might mean for economic growth as well as inflation. We’ll be back with the outcome of Boris’ popularity contest tomorrow.
Have a great day.