Please see the latest Brooks Macdonald Investment Bulletin received this morning (26/01/2023)
What has happened
Yesterday’s equity session started poorly but gradually recovered over the course of the day with the US index broadly flat by the close. One of the primary drivers of the weaker market narrative earlier in the day was Microsoft’s Azure sales outlook which disappointed investors. Earnings after the closing bell last night included IBM and Tesla which both beat earnings estimates, setting US index futures up for a better day today.
Bank of Canada
Ahead of a busy week of central bank meetings, the Bank of Canada announced their latest policy statement. The bank raised rates by 25bps, in line with expectations but did so alongside a dovish statement. The bank said it expected ‘to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.’ This pause in rate hikes was conditional on inflation coming under control after the bank’s 8 rate hikes in a row however with the Bank of Canada seen as a monetary policy leader this cycle it will be closely watched by other central banks.
Preview of next week’s meetings
On Wednesday next week we have the Federal Reserve where a 25bp rate rise is fully priced into the market’s expectations. The Fed, distinct to the Bank of England for example, operate a range for its interest rate policy, currently the lower bound is 4.25% and the upper bound 4.5%. After next week, the Fed is expected to hike again in March before taking a pause with the upper bound of 5%. The Bank of England is also expected to raise rates on Thursday next week but the bank is viewed as behind the curve by financial markets and therefore a large 50bp hike is the bond market’s base case. The UK ‘terminal rate’ is expected to reach between 4.25% and 4.5% by the summer. Lastly the pricing of ECB policy has been quite volatile as investors try to reconcile better economic data, falling inflation and lower energy prices with a hawkish central bank. The market has fully priced in a 50bp hike next week and a good chance of another in March however the terminal rate for the ECB, expected to be reached over the summer, is expected to be a mere 3.25%.
What does Brooks Macdonald think
The ECB is expected to maintain its hawkish narrative for the foreseeable future, in part as the ECB has been behind the US and UK in raising interest rates and therefore is further from ‘restrictive’ territory. One of the major risks in markets however is the number of rate cuts priced into the US market by the end of this year. The market expects two or three 25bp cuts before the end of 2023, and given the Fed’s hawkish narrative at recent meetings, there is a strong disconnect between the bond market and the Fed at this juncture.
Bloomberg as at 26/01/2023. TR denotes Net Total Return
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Alex Clare
26th January 2023