Week ending 9th June 2023.

Markets were surprised by the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) this week, as both increased interest rates. Policymakers from both banks believe that the previous monetary policy measures were not sufficiently restrictive to rebalance supply and demand and achieve sustainable inflation at the 2% target. The unexpected hikes sparked some speculation that policymakers may need to maintain higher rates for an extended duration.

The U.S. Federal Reserve prepares to conclude its upcoming meeting on Wednesday 14 June: it is widely anticipated that the Fed will maintain its key benchmark interest rate of 5.00% to 5.25%. This could potentially break a streak of 10 consecutive meetings during which the rates were raised and would provide a welcome boost to equity and bond markets. In the event that rates remain unchanged in June, investors will be closely monitoring any signals regarding the possibility of the Fed resuming rate hikes at its subsequent meeting ending on 26 July 2023.

Despite the Federal Reserve’s most aggressive rate hikes cycle since the 1980s, the US has demonstrated remarkable resilience. With recent boost from tech stocks, the S&P 500 has achieved a remarkable 20% gain from its October low, a significant milestone often associated with a bull market.  Although the housing sector has experienced a slowdown and the manufacturing industry faces challenges, consumer spending, which is a core driver of the economy, has managed to withstand higher prices and interest rates. This resilience can be attributed to robust job creation and increased incomes, which have provided support for consumer spending.

The upcoming CPI release and policy meeting are poised to have a significant impact on equity-market valuations and set the tone for the rest of the summer. A fall in inflation, as anticipated, could help alleviate concerns following the unexpected rate hikes by the RBA and BoC.

Looking to Europe, data showed the bloc experienced an unexpected contraction of 0.1% quarter-on-quarter during the first three months of 2023, contrary to initial estimates of a modest 0.1% increase. Furthermore, revised figures for the final quarter of 2022 indicate a 0.1% decline instead of a flat reading, signifying that the Eurozone has now entered a minor technical recession advanced by high inflation and elevated borrowing costs. Despite signs of a slowing economy the European Central Bank is expected to hike interest rates by 25 basis points on Thursday 15 June, and again in July, before pausing for the rest of the year as inflation remains sticky.

It’s a busy week ahead economic data wise. We are expecting US CPI, retail sales and industrial production. Also this week, we have UK Unemployment rate, GDP and balance of trade, Eurozone industrial production, US PPI, Chinese retail sales and industrial production. And of course, interest rate decisions from ECB and the Federal reserve.

Kate Mimnagh, Portfolio Economist