Market Update

This week, the spotlight in the equity markets was primarily on the Fed and BoE's monetary policy discussions.
Given the pressing inflation numbers, it was anticipated that both central banks would opt for a rate hike. As expected, the Fed raised the US interest rates by 0.50%, and the BoE hiked the UK rates by 0.25%.
What intrigued us more, however, was the voting disparity among policymakers and their insights during the press conferences about potential future rate hikes. Although their stances were reassuring, equity markets still wrapped up the week on a down note.
In the US, Fed Chairman Jay Powell essentially dismissed the notion of subsequent hefty rate hikes. He highlighted the probability of continued rate increments, each not exceeding 0.50%. Consistent with our earlier discussions, we've believed that the financial markets' anticipation of a series of aggressive rate hikes was misjudged. The current inflation surge, in our view, isn't due to overwhelming demand, hence the rate hikes should be gradual and restrained.
Acknowledging that present inflationary factors, including the conflict in Ukraine and renewed COVID-19 lockdowns in China, might persist for some time, we anticipate these transitory elements will soon transform into next year’s 'base effect.' This transition should result in a peak in inflation rates later this year, followed by a notable decline in 2023, all without necessitating central banks to enforce aggressive rate hikes.
The narrative was similar in the UK. The rate hike of 0.25% saw a 6-3 vote split (with three policymakers favoring a 0.5% increase). Intriguingly, two out of the nine policymakers did not foresee the necessity for further hikes. With the BoE's projection of a 0.25% contraction in the UK economy for 2023, it aligns with our stance that significant rate hikes would be detrimental to the UK economy. This also implies that unless inflation spirals out of control, the heightened interest rates may not persist for long.
For the upcoming week, our attention will be on the UK's Q1 GDP, industrial production figures from the UK & Eurozone, inflation data from the US & China, the University of Michigan's consumer sentiment index, China's trade balance, and Japan's household spending statistics.