Week in Review: Fed Doesn’t Blink Despite Banking Turmoil

The most closely watched event of the week was the conclusion of the Federal Open Market Committee’s (FOMC) meeting on Wednesday. As expected, the FOMC raised interest rates by 0.25% to a range of 4.75% to 5.00%. Fed Chair, Jerome Powell signalled that the battle against inflation must go on, despite acknowledging tensions in the banking system, emphasizing his belief that the banking system remains resilient. In response to questions, Powell also added that Fed officials “don't see rate cuts this year”.

Nevertheless, the Fed’s updated March “dot plot” (showing individual policymakers’ rate expectations), indicates a growing disparity in outlooks, suggesting that officials are expected to stop raising rates after one more hike in May. In summary, the Fed appears closer to a pause in its rate-hiking cycle.

Economic data released this week, showed that momentum in the U.S. economy remains resilient, with weekly jobless claims remaining near 5-decade lows (coming in at 191,000 in the week ended 17 March). The S&P Global Composite Index (measuring both services and manufacturing activity), increased from 50.1 to 53.3 (above 50 implies an expansion), indicating the fastest pace of private sector growth since May 2021.

The big news out of Europe this week, was the announcement that Swiss Bank, UBS agreed to take over its long-time rival Credit Suisse as authorities stepped in to halt a dangerous decline in confidence in the global banking system, stemming financial market panic unleashed by the failure of two American banks earlier this month. UBS agreed to buy Credit Suisse in an emergency rescue deal, paying $3.25 billion for Credit Suisse, about 60% less than the bank was worth when markets closed last Friday. More recently, uncertainty has emerged around Deutsche Bank, whose share price fell, and its cost of insurance rose sharply late last week.

In other European news, consumer confidence unexpectedly dropped to a level of -19.20 in March, compared to market expectations for an improvement from February’s -19.10 reading. Economic sentiment deteriorated more than expected to a reading of 10.00 (expectations: 23.20) compared to February’s 29.70 reading.

On a positive note, Swiss watch exports rose 12.2% in February as orders from China grew for the first time in four months following the end of Covid-Zero policies.

In the UK, inflation unexpectedly accelerated for the first time in four months as food and drink prices increased at the fastest pace in 45 years. Headline inflation increased by 10.4% (year-on-year) in February after a 10.1% gain the month before. Economists had expected the reading to fall back into single digits.

Unsurprisingly, the Bank of England (BoE) increased its key interest rate by 25 basis point to 4.25%, in line with market expectations. The cost of higher interest rates continues to weigh on UK property prices, which fell at the fastest pace in 12 years in January (excluding the pandemic).

Japanese consumer prices rose by 3.3% (year-on-year) in February, less than the market’s expectation for a 4.1% increase (compared to a 4.3% increase in January).

Global equity markets were stronger this week. In the U.S., the Dow Jones (+1.18%), S&P 500 (+1.39%) and Nasdaq (+1.66%) all ended the week higher. Similarly, the Euro Stoxx 50 (+1.61%) and FTSE 100 (+0.95%) were positive. In Asia, the Nikkei 225 (+0.19%), Hang Seng (+1.95%) and Shanghai Composite Index (+0.46%) also ended the week higher.

MARKET MOVES OF THE WEEK

South Africa's headline consumer inflation edged higher in February to 7.0% year-on-year from 6.9% in January. Core inflation rose more considerably from 4.9% year-on-year to 5.2%, surprising consensus. The main surprise came from medical aid contributions, where inflation rose from 4.8% in January to 7.5% in February.

At the same time, consumer confidence plunged in the first quarter, as South Africa continues to be plagued by severe power shortages. The consumer confidence index, compiled by the Bureau for Economic Research, slumped to a reading of -23.0, from -8.0 in the fourth quarter of 2022.

The IMF cut South Africa’s GDP growth for FY23 down to 0.1% (from 1.2% in January), stating that SA’s near-term growth outlook has deteriorated.

The JSE All-Share Index (+2.99%) posted strong gains this week. Strong performances came from the resources (+2.23%) and industrial (+4.71%) sectors, whilst financials (+0.47%) posted modest gains. By Friday close, the rand was trading at R18.16 to the U.S. Dollar, appreciating by +1.68% for the week.

CHART OF THE WEEK

The so-called “dot plot” graph represents a summary of each Federal Open Market Committee (FOMC) Member’s projection for the fed funds rate (shown as a dot). The FOMC now thinks that rates will end 2023 at about 5.1%, unchanged from their median estimate when the dot plot was last published in December. As it stands, the Fed has found middle ground by coupling its rate hike with language that doesn’t pre-commit to more hikes in future. Source: Bloomberg.

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

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