CENTRAL BANKS DELIVER EXPECTED RATE HIKES WITH FURTHER RISES PROMISED TO TACKLE INFLATION

CENTRAL BANKS DELIVER EXPECTED RATE HIKES WITH FURTHER RISES PROMISED TO TACKLE INFLATION

This week while the invading Russian forces continue to cause immense destruction and suffering in Ukraine, the impact on the global economy was under the microscope as investors waited to see if either the US or UK central bank would react. While both referred to the impact of the Ukraine invasion, they raised interest rates as expected. The Bank of England specifically highlighted the situation in Ukraine and tried to lower expectations of how much it might tighten monetary policy.

Elsewhere in the US there was far more ambiguity. The Federal Reserve largely did what it was expected to do, but interpretations on what this means vary wildly. Within minutes of the decision some analysts claimed this was extremely hawkish and the bank is going to tighten hard in the future, while others said this was a pro-growth move and soft on inflation. The bank’s stated policy is to raise rates to 2.8% sometime next year, which is widely expected to be enough to cause a recession. Your view on the Fed’s stance largely comes down to whether you believe it or not.

GLOBAL: CENTRAL BANKS ATTEMPT TO TACKLE RISING INFLATION

The Bank of England and the US Federal Reserve both raised interest rates, as expected, as they take steps to address rising inflation. The Fed increased rates from 0.25% to 0.5% and indicated that rates are likely to rise at all six of their remaining policy meetings in 2022. Meanwhile, the BoE increased interest rates from 0.5% to 0.75% and said it now expects inflation to hit 8% by the end of June.

The Fed’s decision had the biggest impact on markets as predictions for rate rises are now considerably more aggressive. The median expectation for rates in 2023 among the Fed’s board has increased from 1.8% to almost 3% since December. US Equity markets rallied following the announcement. The Nasdaq was up by 4.7% and the Treasury curve showed signs of flattening as the 10-year bond yield fell to 2.1%. In the UK, government bond yields increased at the start of the week but a rise in prices towards the end of the week has left yields little changed overall.

Three weeks on from Russia’s invasion of Ukraine and markets are still being buffeted by events in eastern Europe. Equity markets have seen several big shifts this week as news of negotiations between the two countries raised hopes of a ceasefire before receding again. Despite the elevated volatility, most developed equity markets have risen strongly this week.

Commodity markets have also seen considerable movement as sentiment has switched back and forth. The price of Brent Crude fell below $100 a barrel early in the week only to jump higher when Vladimir Putin dismissed suggestions that Russia and Ukraine were close to an agreement that would end the fighting. The price of gas has seen even more dramatic movement as wholesale prices in the UK and Europe have fallen around 22% this week. If energy prices remain at current levels, or fall even further, this will help remove some of the inflationary pressure caused by the Russian invasion.

CHINA: GOVERNMENT REASSURANCE ADDS TO VOLATILITY

While attention has been focused on Ukraine and Russia, some of the most extreme movements in equity markets in recent weeks have been in Chinese markets. From a peak in early January, the MSCI China index was down 29% by the beginning of this week. Shares fell 6% on Monday alone after a sharp rise in Covid cases led to a number of local lockdowns, including important manufacturing areas such as Shenzhen. This added to concerns about further government interference, a slowing economy and sharp deterioration in China’s property sector.

This picture was turned on its head in the latter part of the week after a senior economic adviser to President Xi Jinping said the government is taking steps to boost the economy and introduce policies ‘favourable to the market’. The indication that Beijing has stopped interfering with the private sector triggered a sharp re-rating of Chinese stocks, helping the index to gain 15% on Wednesday to end the week up 13%.