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March 24, 2023

Weekly update

Weekly Investment Insights

Market Highlights

  • Fears about the health of the financial sector weighed on markets, even as policymakers stepped in to calm nerves. ECB President Christine Lagarde issued a statement saying: The euro area banking sector is resilient, with strong capital and liquidity positions. In any case, our policy toolkit is fully equipped to provide liquidity support to the euro area financial system if needed… However, banking stocks were still under intense pressure as of Friday with investors worried about the financial hit that banks may take from central banks’ aggressive tightening.
  • Controversially, amid UBS’ hasty takeover of Credit Suisse, $17bn of Credit Suisse AT1 bonds were written off, even though shareholders were paid as part of the deal (with their shares converted into UBS shares, at a lower rate). The ECB, the Single Resolution Board and the European Banking Authority issued a statement on Monday to reassure holders of AT1 bonds in Eurozone banks that they would not suffer the same fate as Credit Suisse investors, should such a situation arise.
  • Higher-than-expected PPI data from Germany and the UK’s February inflation print underlined the fact that the fight against inflation is not won, even if banking sector turmoil has served as a momentary distraction. UK inflation rose for the first time in four months from 10.1% to 10.4%, versus 9.9% expected. The biggest pressure came from food and non-alcoholic beverage costs (the highest rate since August 1977).
  • Across the Atlantic, the Fed increased interest rates by 25 basis points to 4.75%-5%, the highest level since 2007. The Fed continues to prioritize its battle against inflation, and sees the banking sector as "stable and resilient", yet forward guidance was noticeably softer.
  • US initial jobless claims fell to a three-week low of 191,000 in the week ending March 18 (compared to 197,000 expected), indicating that the labour market remains strong.
  • China said it would “firmly oppose” any forced sale of TikTok. The comments came as TikTok CEO Shou Chew testified in front of US lawmakers amid mounting scrutiny of the app.


Economic calendar for the week ahead (27-31st March)

Monday – Germany Ifo Business Climate (March). France Unemployment Benefit Claims (February)

Tuesday – France Business Confidence (March). Italy Business Confidence & Consumer Confidence (March). US Goods Trade Balance Adv (February) & Wholesale Inventories (February), S&P/Case-Shiller Home Price Index (January) and CB Consumer Confidence (March)

Wednesday – Germany Gfk Consumer Confidence (April). France Consumer Confidence (March). US Pending Home Sales (February)

Thursday – Euro Area Economic Sentiment (March). Spain Inflation Rate (March). Italy Unemployment Rate (February). Germany Inflation Rate (March). US Initial Jobless Claims (March/25) and GDP Growth Rate (Q4)

Friday – Japan Unemployment Rate (February). China NBS Manufacturing PMI (March). Germany Retail Sales (February) & Unemployment Rate (March). UK GDP Growth Rate (Q4). France Inflation Rate (March). Euro Area Unemployment Rate (February) & Inflation Rate (March). US PCE Price Index (February) and Personal Income & Spending (February).

Story of the week: Fighting inflation remains top priority for Central Banks across Europe and the US

Source: OECD, Bil

The Eurozone, US, UK and Norway: what do these four geographic areas have in common?

All four have inflation rates more than three times higher than their target rate. Moreover, their monetary institutions all pressed ahead with their rate hike campaigns in recent days, implying that the fight against high inflation remains top priority, despite concerns in the banking sector.

On March 16, the ECB stated that inflation is projected to remain "too high for too long" as the majority of policymakers voted to raise the three main rates by another bumper 50bps. Last week, Lagarde added that “inflation is still high, and uncertainty around its path ahead has increased… the public can be certain about one thing: we will deliver price stability, and bringing inflation back to 2% over the medium term is non-negotiable.” Following the same line, the governor of the German Bundesbank added “If we want to curb this stubborn inflation, we will have to be more stubborn.” While pushing ahead with rate hikes, the ECB softened its forward guidance, emphasising a “data dependent” approach from here on out. Policymakers are likely cognisant that they can afford to do so, as tighter credit conditions will likely do some of the legwork for them.

On Thursday, just after UK inflation came in hotter than expected, the Bank of England delivered a  25bps hike, bringing its key rate to 4.25% in what was the 11th rise in a run. Importantly, the BoE pledged to hike further if inflation pressures prove more persistent. Nonetheless, this is not it’s base case, with the bank expecting inflation “to fall significantly” in Q2, aided by falling energy prices and the government’s move to extend the Energy Price Guarantee.

A little further east on Wednesday, Norway’s central bank raised rates by 25 basis points to 3%, as expected, and guided towards two more 25bp hikes in May and June. The move was in response to currency weakness and a 6.3% inflation print for February, with the service sector a key culprit behind price increases. Additionally, the Norwegian labour market is extremely tight, with the employment rate continuing to rise.

On Wednesday, the Fed chimed in, raising interest rates by 25 basis points while clearly indicating that fighting inflation remains its top priority, despite the backdrop of banking disruptions. In addition to these measures, the Fed announced that it would continue to reduce its balance sheet at the same rate as before ($60 billion worth of Treasury bills and $35 billion of mortgage-backed securities per month). The Fed now sees economic growth for 2023 lower than expected at the end of 2022 (0.4% vs 0.5%) and PCE inflation is expected to reach 3.3% for this year 2023, higher than the  3.1% it predicted in December. Jerome Powell emphasized the need to get inflation back to target  and that while there are going to be costs associated with achieving this goal, the costs of failing to do so would be much higher. The forward guidance was however softer, stating that “Some additional policy firming may be appropriate”.

Adding to the hawkish moves, Switzerland’s central bank announced that "for the Swiss National Bank, the banking crisis is over, not the fight against inflation" and proceeded to raise rates by half a point, even though its inflation is one of the lowest in the world (3.4% YoY in February). It also raised its inflation forecast.

From the week that passed, we can conclude from central bank posturing that the banking turmoil is not going to put a hard brake on their policy actions. This somewhat explains the rout in banking stocks that played out across last week, with investors anxious that continued tightening could exacerbate or reveal new vulnerabilities in the banking sector. Financial regulators and governments have taken action in recent weeks to contain the risk of contagion from issues exposed at individual lenders. While their job is indeed complicated by an uncertain economic environment and fragile investor confidence, we think they will succeed.