This week we entered the fifth month of the year. It has already been a significant start to the month with various data releases including the conclusions of the US Fed and European Central Bank (ECB) meetings. Both policymakers decided to increase base rates by 25 bps, despite differences in opinions from investors. We will discuss this in more detail shortly.
Firstly, it’s important we cover First Republic, which is the latest US regional bank to collapse, and it was slightly larger than Silicon Valley Bank (SVB), which made the headlines in March. On Monday, US regulators seized First Republic bank and JPMorgan were successful in the government auction, acquiring the bank. First Republic was subject to the same doom as SVB, as interest rates rose, the large loans on First Republic’s books dropped in value. They also planned to sell off unprofitable assets such as low interest mortgages that were provided to clients, as well as plans to lay off up to a quarter of its workforce but this proved to be too little too late. Once SVB went under and knocked confidence in the regional banking system, clients pulled over $100bn of deposits from First Republic in a few days with ease via the use of mobile devices. The US Fed stressed that the resolution of First Republic was “an important step to drawing a line” under a period of stress in the banking system.
On Wednesday the US Federal Reserve took further steps to battle inflation and raised rates by 25bps to 5.25%. There were many investor whispers before this was announced that the US Fed were considering a pause, however commentary from Fed Chair Jerome Powell has proved this was not even an option considered. “We are prepared to do more” is a strong tone that indicates the Fed are hell bent on reaching their inflation target of 2%. The next policy decision will be in June. Many investors consider the US Fed to have now finished their interest rate hiking cycle, however stronger than expected US Non-Fam Payroll data, released this afternoon, points to resilience in the labour market. This will likely keep upward pressure on wage inflation and consumer spending and may mean the US Fed continue in raising interest rates.
Eurozone inflation on Tuesday was a mixed bag of results as headline inflation (year-on-year) increased to 7%, however core inflation (excludes food and energy prices) fell to 5.6%. This was a big talking point ahead of the ECB meeting as external policy makers, including French central bank chiefs, suggested a more measured move was needed to allow European economies to adjust to the effect of previous hikes.
The ECB finalised a 25bps rate hike, which is a slowdown from previous 75bps and 50bps hikes since July 2022. The headline interest rate is now 3.75%, and this is likely to increase further with President Lagarde stating, “We know we have more ground to cover”. This ruthless tone shows the dedication the ECB has towards the 2% target it has set for inflation. The Bank of England is next up in line next Thursday, and if I was a betting man, I would back a 25bps hike from the current level of 4.25%.
In the UK, some headway was made with the Government and NHS coming to an agreement on a 5% pay increase for NHS staff. This move was agreed by health union GMB who have accepted the government’s “take it or leave it” offer, however this could split unions as health union Unite, rejected the deal with workers set to continue strikes. Tens of thousands of nurses are expected to stage a 28-hour strike from Sunday evening, even after being presented with a deal of a one-off payment of £1,250 – £2000, on top of a £1,400 rise in basic pay. However, unions are still concerned the pay increase is not significant enough as inflation remains high, outstripping the proposed wage increases.
In such complicated times it’s important to maintain a long-term approach to investing. Being invested doesn’t necessarily exclude you from the dangerous waters but a long-term approach and added diversification in portfolios certainly allows investors to face up to them with more success. Valuations across most equity markets continue to look compelling, while yields on fixed income assets have rarely been higher over the last decade.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.