WeeklyWatch – Markets wait for banks to set course on interest rates

13th June 2023

Stock Take

Markets listless ahead of key announcements

With interest-rate decisions imminent from banks around the globe, investors – though poised for action – kept their proverbial anchors dropped last week. The result was that markets were mostly found treading water, while policymakers at the Federal Reserve, European Central Bank and Bank of Japan pondered the continuing challenge of inflation.

The issue of the US debt ceiling and recent banking crises have commanded the narrative over the last few months, but markets are back to intently assessing the macro factors driving central banks and where interest rates are going to end up.

It won’t be smooth sailing, as inflation still isn’t playing ball. Indeed, investors were given a stark reminder that the rise in global interest rates isn’t over yet. The central banks of both Australia and Canada caught markets off guard – the latter hiking its interest rates to a 22-year high of 4.75% in the face of an overheating economy and stubbornly high inflation.

This was similar to the actions in Australia. After a pause in its tightening cycle in April, the Reserve Bank of Australia had increased interest rates in May, with another 0.25% hike a week ago. These actions came in spite of the elevated risks of a steep economic downturn, as data indicated that the first-quarter GDP expanded at its weakest pace in 18 months.

Troubled waters for US jobs?

After the surprise moves from Australia and Canada, the odds of the Federal Reserve holding interest rates lowered after the moves. This was short-lived, as new claims for unemployment benefits in the US surged to the highest level in over 18 months, as reported on Thursday. Wall Street climbed as investors gained confidence the Fed would take a step back and see if its actions were working.

Signs they could be working arrived in the news that the US services sector barely grew in May, as the post-pandemic binge on dining out, travel and other social activities continued to peter out. In response, services inflation also slowed, which comes as a positive development for the Fed’s efforts to bring inflation down to its 2% target. The services sector accounts for more than two-thirds of the US economy.

Expectations for ECB hikes

Ahead of this week’s rate decision, European Central Bank president Christine Lagarde firmed up expectations of more rate rises by reaffirming that it was too early to call a peak in core inflation, despite “signs of moderation”. Revisions to first-quarter GDP inferred that the eurozone economy fell into recession during the winter, recording two consecutive quarters of -0.1% growth.

Mark Dowding of BlueBay Asset Management commented:

“Data in Q2 has also been soft, though we think that it would be incorrect to be too pessimistic about the European economic outlook. Labour demand remains robust, with unemployment at its lowest since the formation of the Monetary Union in 2000. Although there are pockets of weakness in the regional economy, there are also stronger spots, and we see fiscal policy continuing to be growth supportive during 2023.”

In a sign that markets are safely navigating the uncertainty for now, on Wednesday the VIX volatility index clocked its lowest level since February 2020. However, each of this week’s policy announcements and the US inflation news have the capacity to drive volatility.

Retail sales struggle to keep an even keel

On home shores, UK retail sales grew at their slowest pace in six months in May, according to data from the British Retail Consortium. This can be attributed to the sharp increase in food prices, which prompted consumers to limit their spending in other areas.

Notably, the only sector where shoppers increased their expenditure was in food, with sales rising by 9.6%. However, despite the sales growth, the volume of food sold actually decreased slightly, indicating that shoppers had to spend more money to purchase fewer items. Additionally, there was a 3% decline in total online sales, as consumers opted to search for deals in-store.

In a further indication of the financial strain felt by British households, UK Finance – the trade body for the banking sector – published data showing that total household savings shrank year-on-year for the first time in at least 15 years. The value of deposits in instant-access accounts fell by 4% to £867bn in March compared with £905bn a year earlier, as people dipped into savings pots to cover larger bills and daily living expenses.

Japan rides the waves

Japan’s Nikkei index bounced around at the end of the week, jumping 2% on Friday after plunging from a 33-year high in the previous session – an upturn influenced by US rate-pause hopes. Expectations of a policy shift this week by the Bank of Japan remain muted, as it seems content to continue an ultra-accommodative monetary policy for fear of moving prematurely.

In other parts of Asia, China’s exports shrank much faster than expected in May, while imports, especially from developed markets, extended declines. Exports slumped 7.5% year-on-year, against a forecast fall of 0.4%. The news underlined the need for China to rely on domestic demand as the global economy slows. Although Beijing may introduce further stimulus measures, its ongoing focus on long-term structural reform is likely to impede short-term growth.

Wealth Check

‘Telling your story in numbers’ is a phrase you’ll encounter time and time again when launching a new business. It means looking at your financial figures to identify what drives your business – and communicating these effectively.

These metrics will help grab the attention of potential lenders, investors or other stakeholders. But perhaps most importantly, they are critical for running your business successfully in the long term.

Technology can be king in propelling your businesses into the next stage of growth. For example, if you regularly gather figures about sales, costs, profit and cash flow, and can analyse them, it will give you insights such as:

  • Which of your goods and services are profitable
  • How much they cost to produce
  • Whether they are low or high margin
  • What levers you can adjust to boost growth, efficiency and cash flow for income and reinvestment
  • Where you, as the owner, can generate the most value and which tasks to delegate or outsource.

Analysis of these figures should also enable you to prevent or quickly pivot in response to any financial problems.

One reason some small businesses fail to tackle their financials is that owners are nervous or uncomfortable around numbers and numeracy. But spreadsheets can be a great help, and there are many other financial-software solutions you can leverage to do the hard work for you.

They can turn columns and rows into more digestible and visually interesting graphs and tables to help you understand and communicate your numbers. These packages can also provide real-time analysis tools, helping you make quick, proactive decisions and giving you that competitive edge.

Remember, the formula for all successful businesses is good intelligence + good analysis = good decisions.

The Last Word

“It looks like the competition this year, this final, was written in the stars.”

– Manchester City manager Pep Guardiola describes winning the Champions League – and therefore the ‘Treble’ – over the weekend.

BlueBay Asset Management is a fund manager for St. James’s Place.

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SJP Approved 12/06/2023