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Weekly Market Update Monday 15th May 2023

Investor sentiment remains mixed amidst banking worries and US debt ceiling concerns.

Jitters over the health of the US regional bank sector resurfaced, dragging down indices towards the end of the week. PacWest Bancorp, the Los Angeles-based lender, announced it had lost 10% of its deposits in the first week of May, prompting its shares to fall 23% on the news. The US regional bank index fell 2.4%.

Meanwhile, sentiment soured as the impasse over the raising of the US government debt ceiling continues. The debt ceiling is a law that limits the total amount of money that the government can borrow and periodically US Congress votes on whether to raise the debt ceiling. Albeit typically after much political sparring between Democrats and Republicans. Historically the US has never defaulted on its debts, but nonetheless a meeting between President Joe Biden and top lawmakers scheduled for today has been postponed, stoking further investor concern. The federal government could run out of money to pay its bills as soon as 1st June if the ceiling is not raised.

As of 9am London time, the US index fell just into negative territory, down by 0.14%, though the technology index fared better rising 0.76%, with growth companies rising on the prospect of a pause in interest rate rises after weaker than expected US inflation data. Performance in Europe was mixed, with the UK declining 0.34%, and Europe ex UK flat over the week. Stocks in China fared worse, with the Hong Kong and Shanghai indices falling 1.86% and 1.95% respectively, after Chinese import volumes declined 7.9% year on year, far deeper than analysts’ expectations of a 0.2% contraction. Japan had a better week however, up 1%.

US inflation comes in weaker than expected.

US inflation came in slightly below expectations. The Consumer Price Index for April eased to 4.9%, annualised slightly below forecasts of 5%. Core inflation excluding food and energy remains more elevated however and dipped slightly to 5.5% year on year. Meanwhile, Producer price data also came in weaker than expected coming in at 2.3% for April, down from 2.7% annualised in March. The data so far suggests the Federal Reserve is making progress in taming inflation. Weekly US initial jobless claims also rose to 264,000, hitting their highest level since October 2021, which is expected to reduce pressure on wage growth.

Bank of England raises interest rates again.

With inflation cooling in the US, the difference is starker in the UK. Inflation remains much higher at 10.1% year on year and so the Bank of England has yet again hiked interest rates, the 12th consecutive rise since December 2021. The central bank increased rates by 0.25% taking the base rate to 4.5%. At the latest meeting the Monetary Policy Committee pushed back its forecast of inflation reaching its 2% target to 2025.

Government bond yields hold steady.

US government bonds rallied somewhat on the weaker inflation data. 10-year yields, which fall inversely to the bond price, fell 7 basis points on the day of the data release. Over the week, as of 9am London time, the 10-year US Treasury yield is trading at 3.39%. 10-year UK Gilt and German Bund yields were relatively unchanged over the week, trading at 3.40% and 3.71% respectively.


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