Back and forth on rate expectations continues

Back and forth on rate expectations continues

Fed Chairman Jerome Powell will give testimony before the US congress this week and is expected to explain that interest rates will probably need to go higher than recently expected. With persistent low unemployment and inflation remaining high, markets already see the Fed lifting rates above levels anticipated just a couple of months ago and there is no longer a general expectation that the Fed will pivot to easing rates later this year.

Two prominent Fed policymakers said that rates should be pushed higher after recent stronger-than-expected economic data. ECB and Bank of England officials are making similar noises.

Inflation data from Germany, France and Spain came in hotter-than-expected. Christine Lagarde, ECB President, said another 0.5% hike would likely come this month.

In the UK, retail inflation hit a twelve-month-high according to the British Retail Consortium (BRC). Andrew Bailey, Governor of the BoE warned that rates in the UK might have to rise above 4% but added “nothing is decided”.

Even so, equity markets had a strong end to the week, helped by counter comments from Raphael Bostic, Atlanta Federal Reserve President, saying he still thought a 0.25% hike at the Fed’s next policy meeting would be adequate.

US ISM manufacturing PMI increased to 47.7 in February, just below estimates and still in contraction territory. Services PMI was slightly lower at 55.1, but still indicates moderate expansion. The US 10-year Treasury Yield rose above 4% last week for the first time since November but fell back below that level on Friday and remains there today (Monday).

Investors will be looking for further clues this week as to how the inflation/rates story will play out. Focus will be on Powell’s testimony, already mentioned, and from US jobs data being released on Friday.

UK Market Chart 3rd March 2023

US Market Chart 3rd March 2023

US Risk Barometer 3rd March 2023

Europe Risk Barometer 3rd March 2023

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