Week in Review: Bank of England Surprises Markets

On Thursday, the Bank of England,?implemented?a 50-basis point?interest rate?hike?(pushing the lending rate to 5%), surprising markets that had priced in a 60% chance of a 25-bps hike.?Following the?decision, markets saw a nearly 50% chance that Bank Rate would peak at 6.25% by the end of this year.?The move comes after U.K.’s?May inflation?figure was published on Wednesday, which showed that inflation in the region remains stubbornly high, with core inflation rising to its highest?level since 1992.?Headline inflation?defied predictions, coming in at 8.7% y/y?vs 8.4% expected, keeping in line with April’s figure.?Core?inflation jumped 7.1% y/y, up from 6.8% in April.?In May, the central bank forecasted?that inflation would?drop?to just over 5% by?year end and be below its 2% target in early 2025.

Keeping with the?inflation theme, U.S. Federal Reserve Chair Jerome Powell?stated?last week, while addressing?the Senate Banking Committee, that?more?rate hikes?may be needed this year.?Powell?additionally mentioned that policy makers feel “it will be appropriate to raise rates again this year, and perhaps twice,”?if the economy performs about as expected.?Decisions will be made on a meeting-by-meeting basis, Powell said, while noting that there is a long way to go to get inflation back down to its 2% goal.

The latest release of flash purchasing managers index’s (PMI)?data on Friday indicates a stagnation in the eurozone economy. The composite S&P Global PMI registered at 50.3. The manufacturing index declined from 44.8 in May to 43.6, while the services measure experienced a significant monthly deterioration, dropping from 55.1 to 52.4, which is an unusually substantial decrease.

On Saturday,?Russian President Vladimir Putin made a firm commitment to mete out consequences to those responsible for an "armed uprising" following the apparent insurrection led by the head of the Wagner private military group?– which threatened to end Putin's 24-year rule.?The insurrection involved taking control of military installations in two Russian cities, namely Rostov-on-Don and Voronezh, and included a warning that the troops could advance towards Moscow. In a sudden change of direction, Yevgeny?Prigozhin, the leader of Wagner, announced that he had halted the advance of his troops towards Moscow and issued orders for them to evacuate Rostov. As part of a negotiated agreement facilitated by Belarus,?Prigozhin?agreed to depart from Russia and relocate to Belarus. In a statement,?Prigozhin said that he wanted to avoid the spilling of “Russian blood”.

Last week, the yen?continued to depreciate?against other major currencies, crossing the 143 mark against the dollar, coinciding with Japan's announcement of its highest core inflation rate since 1981, standing at 4.1%. While other central banks adopted a more hawkish stance, the Bank of Japan maintained its?super loose?monetary policy approach. If the yen experiences further decline, it may necessitate adjustments to the Bank of Japan's yield curve control policy.

No major indicators were released in China during the week. However, mounting evidence that the country’s recovery is losing steam raised fresh concerns about the economic outlook.?China’s People’s Bank of China was the lone major central bank to lower rates last week, cutting the important loan prime rate 0.1% to 4.2% in an effort to lower borrowing costs and boost confidence and consumption.

On the market front,?global indices ended the week?in the red.?Growth stocks outperformed value shares, while large-caps fared better than small-caps.?The?S&P 500 Index?fell-1.39%, while the?Dow Jones?slipped?-1.67%.?The technology-heavy Nasdaq Composite?had a strong start to the week but?ended the week?down?-1.44%.?Shares in Europe?(Euro Stoxx 50,?-2.80%)?and the UK (FTSE 100, -2.37%) fell?over the week?on worries that further interest rate increases might cause a recession in Britain and the eurozone.

Chinese shares (the Shanghai index)?ended the week down?-2.30%, while?in Hong Kong, the benchmark Hang Seng Index declined?-5.74%, its?largest?drop in three months.?In Japan, the Nikkei 225?fell?-2.74%. Gold dipped?-1.84% while Brent Oil?declined by?-2.52%?over the week.

CHART OF THE WEEK

The persistence of the country’s cost-of-living crisis, with U.K. CPI the highest in the G7, will be a headache for the government. Prime Minister Rishi Sunak promised to halve inflation by the end of this year ahead of a general election in 2024. Source:?Reuters, CNBC

We are pleased to share our review of the week's top global economic and capital markets news summarised by our in-house research team. If you would like more information, we’re here to help you. Contact us at?[email protected]?to start your conversation.