Market Commentary: Week to 9 May 2023

Market News

Interest rates remained a focus last week as the US and Europe raised rates by 0.25% each to 5.25% and 3.25% respectively. The S&P 500 closed down approximately 0.8% last week as comments from Federal Reserve Chair Jerome Powell suggested a pivot to cutting rates might not occur as quickly as markets had hoped. Language used in the meeting signalled to keep options open in terms of future interest rate decisions as a focus remains on incoming data and economic developments. There were also renewed concerns regarding the need to raise the US debt ceiling which impacted market sentiment. US Treasury Secretary Janet Yellen notified congressional leaders in a letter that the agency might not be able to meet its debt obligations potentially as early as June 1. Regional banking fears continued as multiple banking stocks plummeted such as PacWest Bancorp which saw a decline of approximately 43% for the week.

In Europe the decision by the European Central Bank (“ECB”) to raise interest rates by 0.25% led to a decline in European government bond yields, notably the yield on benchmark 10-year German government debt fell near one-month lows. This is a slowdown from the three increases of 0.5% we have experienced this year due to turmoil within the banking industry increasing the concerns of reducing the amount of credit to the economy. The ECB President Christine Lagarde expressed that reducing inflation to the 2% target remains the key focus and that interest rates would rise to sufficiently restrictive levels. Inflation in the eurozone accelerated in April to 7.0% year over year from 6.9% in March, leading to expectations that further rate rises by the ECB are necessary.

The UK interest rate decision will be announced on Thursday this week where markets expect the Bank of England (“BoE”) to raise rates by 0.25% to 4.50%. Last week saw signals of a stabilising housing market as mortgage approvals for home purchases in March rose for a second consecutive month. In February lenders approved 44,126 mortgages compared to a sharp uplift to 52,011 in March, which is also the largest number of approvals since October but still below their average of around 70,000 before last September’s mini-budget.

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