CENTRAL BANKS RAISE RATES AGAIN AS THE US FED SIGNALS IT IS REACHING THE END OF THE ROAD

CENTRAL BANKS RAISE RATES AGAIN AS THE US FED SIGNALS IT IS REACHING THE END OF THE ROAD

This week was another central bank week, with US, European and Australian central banks all hiking rates. The similarities end there, however, with the US Federal Reserve signalling that it is more or less done while the European Central Bank warned of more to come. We’re seeing a clear pattern of the US being about six months ahead of everyone else in the fight against inflation.

Elsewhere the pressure on smaller US banks continued as another Californian bank toppled before being taken over by a larger rival. There doesn’t seem to be an imminent banking crisis but conditions are difficult. With fewer people wanting to borrow money at high interest rates, banks are struggling to pay high rates on their deposits with the inevitable result that savers take their money elsewhere. Although not yet a crisis this is a bad sign for the economy. With less lending going on now, we can expect less economic activity later on.

GLOBAL: CENTRAL BANKS RAISES RATES BUT MARKETS EXPECT A PAUSE

Central banks increased interest rates again, although there are signs that central bank policies are starting to diverge. The US Federal Reserve, European Central Bank and Reserve Bank of Australia all raised rates by 0.25%. The RBA’s decision was unexpected but the hikes from Fed and ECB were both widely tipped. The US Fed has increased rates by 5% in 14 months and it indicated it is likely to pause and allow time to review their cumulative effect. Chair Jerome Powell said problems faced by some US banks had tightened credit conditions and this would also cool the economy and labour market.

The ECB was more aggressive with its decision to raise rates. Although core inflation in the Eurozone fell for the first time in 10 months, ECB president Christine Lagarde said it is not pausing and has more ground to cover. Markets are anticipating that rates will pause or even fall in coming months and government bonds rose, sending down yields, while the split in outlook saw the pound, euro and Swiss franc rise against the US dollar.

OIL: BUMPER PROFITS BUT CRUDE PRICE FALLS SHARPLY

BP and Shell both reported very strong updates for the first three months of the year as the energy giants saw profits of $5bn and $9.6bn respectively. As well as reaping the benefit of higher oil prices, BP generated a significant increase in revenue from trading in the international oil and gas market. Shell’s profits were sustained by a big increase in revenue from natural gas production and it promised to use its bumper profits to return cash to investors by increasing dividends and pledging an additional $4bn for share buybacks. BP has slowed the pace of its buyback as the price of oil and gas has been falling in recent weeks.

China’s return to growth was expected to support the price of oil but instead it has fallen steeply. Brent Crude was $82 a barrel at the beginning of January and was as high as $87 in early April, however, fears of recession caused this drop to $72 a barrel this week. This is despite Opec+ countries trying to keep prices high by agreeing a big production cut in April.

BANKS: MORE TURMOIL FOR US REGIONAL BANKS

The sell-off in US banks resumed following the collapse of another regional bank. Last week First Republic reported the scale of deposit outflows in the first quarter and this spooked investors and caused a further outflow of deposits. By Monday it has been seized by US regulators and sold to JP Morgan Chase. The collapse sparked renewed speculation about the strength of other US regional banks. PacWest and Western Alliance experienced a particular steep fall. The FDIC, the regulator tasked with protecting bank deposits, is considering increasing deposit insurance for business deposits or even guaranteeing all customer deposits in an effort to restore confidence in US banks.

In the UK, Lloyds Banking Group reported pre-tax profits were up 50% as higher interest rates made its lending more profitable. However, it increased the amount put aside to cover bad loans. HSBC reported pre-tax profits of £12.9bn, far above the forecast £8bn, and promised to spend an extra £2bn to repurchase shares and restore its quarterly dividend.