Please see below, the ‘Daily Investment Bulletin’ from Brooks Macdonald providing a brief update on markets and economic news. Received late yesterday evening – 20/04/2023
What has happened
Some volatility returned to equity markets yesterday even though US equities managed to rally later in the day to close broadly flat. The catalyst for this was stickier-than-expected inflation data as well as the continuation of the early theme of mixed Q1 US earnings. The UK inflation report, which beat to the upside on both headline and core readings started the more downbeat market tone.
UK impact
UK gilts underperformed again on Wednesday in the aftermath of the inflation report after seeing yields rise on Tuesday after the higher UK wage growth data. A 25bp interest rate rise in May is now fully priced in by the market, the first time this has been the case since February, before SVB/Credit Suisse entered the headlines. Despite the Bank of England continuing to stress that the UK does not require materially higher rates to bring inflation under control, market participants are increasingly sceptical that this is the case in light of the emerging data. The UK data also impacted other geographies with the chance of a 50bp May ECB rate hike being upgraded leading to European bond yields rising as well.
Credit conditions
We will need to wait until next month to see the release of the Senior Loan Officer Survey, a Federal Reserve survey of large banks to gauge bank lending activities, however, yesterday did see the release of the Fed Beige Book. The Beige Book provides a collection of comments/supporting data from the Federal Reserve’s district and contains comments on credit conditions. New York reported that ‘Credit standards tightened noticeably for all loan types, and loan spreads continued to narrow. Deposit rates moved higher.’ That said, many responses did not see large changes, and California reported signs of stabilisation after being at the centre of the turmoil last month. Market measures of financial stress also suggest that much of the tightness caused by the banking issues in March have been reversed but the Senior Loan Officer Survey will be an important data point when released next month.
What does Brooks Macdonald think
While financial market conditions appearing to improve as investors look beyond the banking crisis is a positive, it does mean that if the market is no longer tightening conditions, central banks will need to do the heavy lifting. Yesterday’s move higher in gilt and European yields reflects the reality that central banks will likely now need to tighten more than investors expected a few weeks ago.
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Alex Kitteringham
21st April 2023