Please see the latest Weekly Market Commentary from Brooks Macdonald received this morning:
Banking fears characterised last week with concerns culminating in questions over Deutsche Bank’s creditworthiness
Despite the UBS and Credit Suisse deal, last week was characterised by high levels of banking sector volatility, culminating with fears over Deutsche Bank’s credit worthiness on Friday. Words from regulators and officials over the weekend have helped to calm market concerns setting a better backdrop for European financials this week.
This week sees important US and European inflation readings including the US Federal Reserve’s preferred measure
While investors have been focusing on the banking sector risks in the short term, inflation will quickly return as a major driver of market sentiment. This week sees the release of the US Personal Consumption Expenditure (PCE) inflation numbers, the preferred measure of the US Federal Reserve. Core PCE is expected to have expanded by 0.4% on a month-on-month basis, keeping the year-on-year figure flat at 4.7%. Within the PCE release will be the US personal consumption and income lines which are both expected to decline after strong results in January. These barometers of consumer demand will also be supported by the releases of the Conference Board’s consumer confidence survey as well as the Michigan Sentiment survey. Europe will also see a fresh set of inflation data with Germany’s preliminary inflation readings released on Thursday before the Eurozone wide release on Friday. The market expects the annual rate of Eurozone Core Consumer Price Index (CPI) to pick up from 5.6% to 5.7%, pushing back against hopes of a rapidly falling inflation picture.
With the communication blackout concluded, Fed officials will now be able to comment on the volatility of the last few weeks
Throughout the banking turmoil of the last few weeks Fed speakers have largely been unable to comment given the pre-meeting communication blackout. This week sees a range of Fed speakers as they are now able to comment on not only the Fed’s 25bp hike last week but also the broader contagion risks in the banking sector. The market ended the week expecting only a 25% chance of a 25bp rate at the May meeting, with bond investors increasingly favouring the chances of no change at all. With 88bps of interest rate cuts priced in, how Fed speakers comment on this pricing will be an important bond market force this week.
With sentiment so fragile currently, it is perhaps no surprise that speculation and rumour around the health of major US and European banks can trigger such a strong risk-off response. Authorities and investors will be hoping however that the market can return to focusing on the fundamentals this week such as inflation and the state of the consumer, rather than another round of banking fears.
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Andrew Lloyd DipPFS
28/03/2023