Why Does the UK Have Highest Inflation in G7 and is Brexit A Factor?

Economic

Summary:

Britain appears to be an international outlier after the shock reading in double digits this week.

Britain has the highest inflation rate in the G7, as the only nation in the group of advanced economies with a reading in double digits after last month's shock increase.

With the UK appearing to be an international outlier, some economists have suggested Brexit is having an impact.

International comparisons

On a headline basis, inflation is higher in the UK than elsewhere. In the eurozone, annual inflation slowed to 8.5% in February, down from a peak of 10.6% in October, while US inflation eased to 6% last month, a fall from a high of 9.1% last summer.

However, it is not an entirely uniform picture. Inflation rose in France and Germany last month, while the rate for the EU27 dipped slightly from 10% to 9.9%. In the eurozone, analysts had forecast a bigger fall from 8.6% in January to 8.2%. However, pressure from rising food prices – the same culprit for the UK's shock rise – led to an unexpectedly small decrease.

In both the UK and the eurozone, core inflation – used by central bankers because it excludes energy and food, providing a clearer picture of underlying pressures – rose by more than expected: from 5.8% in January to 6.2% in February for the UK, and from 5.3% to 5.6% for the eurozone.

There are also features of an economy which can cause inflation to rise, or fall, at times that may not be replicated in other nations. The Ofgem price cap in the UK is one example, leading to cliff edges for energy price changes. Economists expect the UK inflation rate to fall sharply in April for this reason, as it is compared against the huge 54% jump in the Ofgem cap 12 months earlier.

While inflation can bob around from month to month – belying an overall trend, and making it harder to isolate Brexit as a driving force – there are still reasons why the UK could be worse off than other nations.

Supply chains

Brexit has added to delivery times and costs for UK imports, a factor likely to be passed on to consumers in the shops.

Part of the inflation shock in February was due to the rising cost of cucumbers, tomatoes and salad, as prices rose amid severe shortages and rationing across the UK last month. Experts had blamed shortages on unseasonably cold weather in southern Spain and Morocco affecting harvests, although others pointed to Brexit, given the lack of empty shelves in EU nations.

Justin King, the former Sainsbury's chief executive, said the UK food sector had been "significantly disrupted" by leaving the EU, while producers in the bloc warned Britain had slipped down the pecking order for deliveries when supplies are tight.

Research from the London School of Economics shows Brexit had added almost £6bn to UK food bills in the two years to the end of 2021.

However, there are also domestic reasons. Growers blame powerful British supermarkets for driving down the prices they are paid, limiting supply, as well as the government's approach to subsidising food production. Economists also say soaring energy bills are the biggest driver of food costs, given the impact on everything from fertiliser, tractor diesel and lorry shipments, to keeping bakery ovens fired and food factory production lines rolling.

Worker shortages

On top of supply chain disruption and energy costs, wages also have an impact. In response to the inflation shock, workers are demanding higher pay settlements from employers, while a lack of available staff in many sectors of the economy is forcing companies to offer higher wages to recruit or retain employees.

Tougher post-Brexit migration rules could be adding to the problem, especially in typically lower paying, lower-skilled roles in sectors such as hospitality, where employers used to be able to rely more on EU workers coming to Britain.

Net migration to the UK has continued to rise since to a record level since Brexit, driven by arrivals from non-EU nations making up a reduction in migration from the 27-nation bloc.

However, research from the Centre for European Reform and UK in a Changing Europe suggests Brexit could still have led to a shortfall of 330,000 people in the UK labour force, after taking into account how the workforce might have looked if Britain had remained in the EU.

With older workers leaving the labour market altogether, and record levels of long-term sickness among the UK working age population, the lack of available staff to fill near-record job vacancies could force employers to increase wages – with potential to fuel inflation further.

Source: The Guardian

To stay updated on all economic events of today, please check out our Economic calendar

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Thomas

Central Bank

The Fed lets its facilities do their work, betting for resumed status quo, and system stability

The Fed hiked 25bp yesterday. The effect has been lower market rates, in particular on the front end as the market takes on board that the Fed seems to be almost done. One theme that we think continues is the dis-inversion of the curve, and we've seen another material move in that direction as a response to the Fed's decision.

Market rates had been edging higher as we headed into the Federal Open Market Committee meeting, which no doubt helped to embolden the Fed to deliver the 25bp hike that the market had (practically) discounted. The market will also be comforted by the fact that the Fed decided to go ahead and hike, when the alternative could have been to hold and nod towards bank angst as the rationale. There is enough in that combination for market rates to re-nudge higher in the weeks ahead, at least till we get to a point where the disinflation story has become more compelling, notwithstanding the impact effect towards lower market rates.

Market technicals are in an interesting place right now. The Fed's balance sheet increased by US$40bn last week as a consequence of support being provided to some banks, including Silicon Valley Bank, Signature Bank and First Republic Bank. And indeed the regional Fed breakout of support confirms that the bulk of additional liquidity went through the New York Fed and the San Francisco Fed.

The consequence of this from a balance sheet perspective is to push against the quantitative tightening policy where US$95bn is being allowed to roll off from the Fed's bond holdings on a monthly basis. This, the Fed argues, is the various mechanisms doing their work. The same logic obtains for the reverse facility, which continued to act to mop up excess liquidity, and has popped higher in the past week, in part a reflection of that. No new angle on this from the Fed today.

It may well be the Bank of England's final 25bp today

The upside surprise in yesterday's inflation reading for February was a reminder for the Bank of England that its inflation problem is not fully tackled yet. Given the easing fears of systemic stress, markets are now leaning heavily towards expecting a 25bp hike today – and they do see at least one more 25bp hike by summer.

Our economist does not think today's decision is as clear cut as the market believes, however. And he also expects that this will become evident in a monetary policy committee remaining heavily divided. Here we could see a vote for a 50bp hike on the one end and votes for no change and perhaps even a cut on the dovish end. The BoE is not focusing on any single inflation indicator, but is focused more on a broader definition of "inflation persistence" and price-setting behaviour where the data has been generally more encouraging over the past month or so. If that continues, our economist still suspects the committee will be comfortable with pausing the tightening cycle in May.

Today's expected hike, and a generally improving market backdrop could still help markets to retrace more of the recent drop in yields. Overall, though, the recent crisis reinforces our view that 10Y gilt yields are then headed to 3% by late 2023/early 2024.

The ECB's job could still be more protracted

Rates have been tentatively moving higher, in the process bear flattening the curves as markets are baking policy tightening back into their outlooks. The big question remains just by how much should policy expectations retrace. From a low of close to 3% the pricing of the terminal rate has moved close to 3.5% again. At its high just before the turmoil it stood just above 4%.

Amid calmer markets ECB members are now re-focusing on the need to raise policy rates further. Naturally these days, always under the condition that the baseline scenario holds. Even the dovish end of the governing council acknowledges that more tightening would be needed then, if only that the uncertainty warrants taking the decisions meeting by meeting.

One might think that Belgium's Wunsch has turned dove cautioning that a tightening of financial conditions "could be doing part of the job, and [the ECB] might have to do less". However, his remarks should probably be benchmarked against his prior comments from early March, when he said "looking at rates of 4% would not be excluded".

Today's events and market view

Central banks are not distracted from their inflation fight, but there is some acknowledgement that the banking shock and the ensuing financial tightening will do some of the job, the uncertainty being just how much. And clearly some central banks are closer to the end of they hiking cycles, as for instance the BoE which we think may deliver its final hike today. Farthest behind is the ECB, and a stretch of calmer markets could further embolden officials to push the message that more hikes are needed. Although there may be spill over from the late-cycle dynamics beginning to unfold elsewhere, we think the EUR curve stands the greater chances of re-flattening, and underperforming versus its peers.

Next to the Bank of England, today's main focus will be on the ECB policymakers' comments given another busy slate of speakers. We should hear, among others, from Austria's Holzmann, Estonia's Muller and again from chief economist Lane himself. In data we will get a preliminary eurozone consumer confidence reading for March as well as the weekly initial jobless claims out of the US.

Source: ING

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Samantha Luan

Forex

USD: Compromise comes at a price

The well-known verse "a spoonful of sugar helps the medicine go down" might have inspired Jerome Powell yesterday as he and his FOMC colleagues offered markets a few dovish hints while delivering a potentially painful 25bp rate hike. As discussed in our meeting review note, those hints primarily consisted of the view that "some additional policy firming may be appropriate" - not "will be appropriate" as before - and on keeping the median dot plot estimate for 2023 unchanged at 5.1%.

The statement was paired with a well-telegraphed message of trust in the solidity of the US banking system, and Powell did offer modest pushback against rate cut expectations during the press conference. However, we doubt the dovish market reaction was either a surprise or an unwanted development for the Fed.

Many had argued that one objective of the Fed yesterday was to avert a major setback in financial market sentiment, the market reaction would suggest this was achieved, and the drop in equities might actually be mostly a function of Secretary Janet Yellen dismissing speculation that the Treasury is planning to provide "blanket" deposit insurance to banks.

However, that came at a price: a considerably less clear Fed communication. No trade-off between price and financial stability is essentially possible only if financial conditions tighten (due to banking stress) enough to bring down inflation, or if regulators and other institutions effectively manage to restore market confidence without anything more than the financial stability tools offered by the Fed. This second scenario requires indeed that, as Powell stated, the US banking system is very solid. Markets are, so far, not trusting the ability of the Fed to treat inflation and financial stability independently. This looks unlikely to change soon, which means that rate expectations should remain strictly tied to developments in the banking crisis. And this brings us to the FX implications.

The dollar weakened on the back of the moderate dovish surprise by the Fed yesterday, and reluctance from the Treasury to consider an extension to the deposit insurance. At the same time, a new regional lender, PacWest is facing increasing turmoil on deposit outflows and First Republic's rating was cut from BB to B by Fitch. So, with a market not trusting the more ambiguous Fed communication and the US regional banking crisis far from resolved, it looks like investor bias on the Fed may stay on the dovish side. This should translate into a continued bearish bias for the dollar, primarily against European currencies should the stabilisation in European sentiment continue. Still, we see a high chance of seeing small USD upside corrections on the way, rather than a straight-line USD depreciation.

EUR: Central bank meetings in Switzerland and Norway

EUR/USD is now officially eyeing the 1.1000 level. We discussed yesterday how that is a key benchmark level for the pair, and we think a break higher would likely mark a rather strong conviction call from the market that the Credit Suisse shock has been successfully absorbed by European markets. That may be a bit premature, and we flagged in the USD section above how the USD bearish bias surely doesn't prevent EUR/USD corrections on the way. In the current elevated volatility environment, those corrections can be quite pronounced, even if short-lived. Today's eurozone calendar includes consumer confidence data for March as well as a few European Central Bank speakers, although our focus in Europe today will mostly be on central bank meetings in Switzerland and Norway.

The Swiss National Bank faces a monetary policy decision in a very turbulent time, as it faces the challenging aftermath of the Credit Suisse rescue deal. Originally, this had appeared to be a no-brainer for the SNB – a 50bp rate hike – and consensus expectations are still pointing at such a move. Despite admitting this has become a much closer call recently, we think the past few days of tentative calm in markets will allow the SNB to deliver the half-point increase today. We must remember that policy meetings in Switzerland occur only once a quarter and that the latest inflation readings surprised on the upside.

We expect a hike in Norway as well, but by 25bp, as previously announced and widely expected. Norges Bank will also publish the updated rate projections, which currently embed only another 10bp worth of tightening. We think NB could revise the peak rate higher on the back of higher inflation and despite the recent turmoil, if nothing else to counter the recent NOK weakness. We expect gains in both the Swiss franc and krone today.

GBP: BoE to hike

The ECB and Fed rate hikes mean that the chances of the Bank of England following suit with a 25bp move today are quite high, even more so following the surprisingly high inflation readings published yesterday. Here is our full market guide to today's BoE meeting.

Markets are now fully pricing in a 25bp scenario and will therefore look for some indications that the further 40bp currently embedded in the GBP OIS curve is warranted. The division within the BoE's MPC may be nothing but exacerbated by the recent market turmoil, the risk is that markets may receive very little guidance on future policy paths. Ultimately, the pound may rapidly default to being driven by external factors: primarily the banking situation and global risk sentiment. A test of 1.25 in cable in the coming days is looking quite likely.

CEE: Strong euro a welcome boost for region

Today's calendar in the region is basically empty and hence the main focus will be on the reaction to yesterday's Fed decision. Higher EUR/USD is good news for FX and the CEE region should thus continue to rally. On the other hand, the negative sentiment left by the Fed could put a bit of a damper on the positive push coming from EUR/USD.

However, today should not be all about the Hungarian forint and the Czech koruna as in the last few days. As we mentioned earlier this week, the Polish zloty and the Romanian leu just needed a stronger euro to strengthen, in our view. Unless negative market sentiment prevails today, the entire region could see decent gains. Still, the previous leaders, the forint and the koruna, should remain at the forefront of the region and move towards 385 EUR/HUF and 23.60 EUR/CZK. The Polish zloty could finally trade out of the March range of 4.680-4.720 EUR/PLN and test lower levels. The Romanian leu could look lower below 4.91 EUR/RON for the first time since the middle of February.

Source: ING

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Thomas

Commodity

The risks to the bullish drivers of the spot iron ore price are rising as the market starts to question the nature and strength of China's economic recovery, while the chances of a global economic hard landing mount.

Benchmark 62% iron ore for delivery to north China, as assessed by commodity price reporting agency Argus, ended at $121.60 a tonne on Wednesday, a two-month low.

The price has dropped 8.8% since hitting $133.40 a tonne on March 15, which was the highest since June last year.

However, despite the recent moderation in the spot price, it's worth noting it's still 54% higher than the 2022 low of $79 a tonne, hit in October.

Since that low the price has been driven higher mainly by optimism over demand from China, which buys about 70% of global seaborne volumes of the steel raw material.

The rally accelerated after Beijing abandoned its strict zero-COVID policy towards the end of last year, as optimism mounted over an economic rebound amid stimulus spending and pent-up demand in the world's second-largest economy.

The iron ore price rally was matched by rising imports by China, with official data showing imports of 194.2 million tonnes in the first two months of the year, up 7.3% from the same period a year earlier.

It's likely that the pace of imports has been maintained in March, with Refinitiv estimating arrivals of around 103 million tonnes, while Kpler forecasts 102.7 million.

On a daily basis this equates to about 3.32 million tonnes in March, which would be an acceleration from 3.29 million in the first two months.

China publishes combined January and February data to smooth out distortions caused by the Lunar New Year holiday, which fell in January this year but was in February in 2022.

The question becomes what the risks are to the so far bullish start to 2023 for iron ore prices and volumes.

The chief one is that China's economic recovery focuses more on boosting consumer spending than it does on rebuilding the residential property sector.

China's economic growth target for 2023 is a relatively low 5%, and it's possible that this could be achieved largely through rising consumer spending, which would support increased demand for energy commodities such as crude oil as demand for transportation increased.

The struggling residential property sector has shown some signs of improvement in the first two months of the year, but most indicators are still in negative territory, so ultimately it's still a drag on steel demand.

The first two months of the year saw a 5.7% drop in property investment, although this was an improvement on the decline of 10% for 2022 as a whole. New housing starts declined 9.4%, still negative but better than the 39.4% slump in December.

Given that construction accounts for nearly a third of China's domestic steel demand, it would mean that the other sectors would have to pick up substantially.

Vehicle and goods manufacturing offer some hope, but they are also exposed to any sharp slowdown in the rest of the world, given China's status as the world's biggest exporter of manufactured products.

Steel decline?

There has also been speculation that China will decide to implement a policy to cut steel output by 2.5% in 2023 from 2022's total of just over 1 billion tonnes.

If such a policy is adopted, it implies that any strength in the first half of 2023, as is currently being seen, will have to be offset by lower output in the second half.

China's domestic steel demand may decline to 910 million tonnes in 2023 from 920 million in 2022, Niki Wang, managing editor for iron ore at S&P Global Commodity Insights, told the Global Iron Ore and Steel Forecast Conference in Perth on Thursday.

While a 10 million tonne drop in China's consumption is relatively small, it still makes it harder to build an overall bullish case for iron ore demand and prices for 2023 as a whole.

The risk is that iron ore demand is being front-loaded into the first half of the year, and potentially will decline in the second, with the concomitant risk prices will also come under pressure.

Source: Reuters

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Devin

Forex

Dollar faced broad sell-off overnight after the less hawkish than expected Fed rate hike and press conference, with Euro emerging as the biggest winner against the greenback. Sterling and Swiss Franc followed suit, while Australian and New Zealand dollars also strengthened but lagged on a weekly basis.

Attention now shifts to BoE and SNB rate decisions. Both are expected to continue their rate hike cycles, but uncertainties remain about the path ahead. Any outcome perceived as less hawkish could push Euro further up, aided by an extended rally in EUR/CHF and a stronger rebound in EUR/GBP.

Technically, EUR/GBP's break of 0.8842 minor resistance affirm the case that corrective fall from 0.8977 has completed with three waves down to 0.8717, after drawing support from 0.8720. Further break of 0.8924 resistance will send the cross through 0.8977 to resume whole rise from 0.8545 (2022 low).

S&P 500 down, reacted more to Yellen than Powell?

US markets experienced a complex development overnight due to simultaneous reactions to two events. Initially, the markets responded bullishly to the Fed's less hawkish than expected rate hike and press conference. However, just an hour before the close, sellers jumped in, and the three major indexes closed -1.6% lower.

The selloff might be more attributed to Treasury Secretary Janet Yellen's comments at a Senate committee. She explicitly stated, "I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits."

Yellen further elaborated, "when a bank failure is deemed to create systemic risk, which I think of as the risk of a contagious bank run…we are likely to invoke the systemic risk exception, which permits the FDIC to protect all depositors, and that would be a case-by-case determination."

Meanwhile, Asian markets have remained sluggish and mixed today, without any apparent signs of bearishness carried over. It may take some more time to understand the unfolding situation fully.

Technically, near term outlook in S&P 500 isn't too bearish yet given it's holding inside a near term channel. However, break of 3901.27 support will argue that the corrective rebound from 3808.85 has completed at 4039.49, after hitting falling trend line resistance. Deeper selloff would then follow through 3808.86 to resume whole decline from 4195.44. Euro Leads Gains as Dollar Struggles Post-FOMC; BoE and SNB Decisions Take Center Stage_2

Euro Leads Gains as Dollar Struggles Post-FOMC; BoE and SNB Decisions Take Center Stage_2

Fed softened hawkish tone, but not dovish

In light of the Fed announcement and press conference overnight, it appears that another 25bps rate hike is likely in May, followed by a prolonged pause with no rate cut expected until next year. The overall picture remains hawkish, albeit not as much as after Fed Chair Jerome Powell's earlier testimony this month.

As anticipated, Fed raised interest rates by 25bps to 4.75-5.00%. While the tightening bias was maintained, the statement softened its tone, stating, "some additional policy firming may be appropriate." Despite recent market turmoil, median projections still indicated an interest rate peak of 5.1% this year, suggesting one more 25bps hike before pausing until next year. The median projection for 2024 interest rate increased from 4.1% to 4.3%, signaling a slower path of rate cuts.

During the post-meeting press conference, Powell acknowledged that "financial conditions seem to have tightened" recently, adding that if the situation persists, it could "easily have a significant macroeconomic effect, and we would factor that into our policy decisions." While he admitted that a pause was considered during the meeting, he emphasized that a rate cut this year was "not our baseline expectation," stating, "the key is we have to have policies tight enough to bring inflation down to 2%."

Suggested readings on Fed:

· FOMC's Fight Against Inflation Finely Balanced

· FOMC Hikes Rates, But End of Tightening Cycle Coming Into View

· Suderman Says: Rates Up as Expected, But Peak in Sight?

· FOMC Hikes Policy Rate by 25 Basis Points, Cautions on Bank Stress

· Fed hikes 25 bps, terminal rate forecast unchanged at 5.1%

· (FED) Federal Reserve Issues FOMC Statement

GBP/CHF extending range trading ahead of BoE and SNB

BoE and SNB are both expected to raise interest rates today. A 25bps hike by BoE to 4.25% is widely anticipated, though the case for a subsequent pause has been shaken by the reacceleration of consumer inflation in February. The Monetary Policy Committee is known for its divided outlook on the amount of tightening needed, and today's voting should continue to reflect this pattern.

An explicit indication of a pause could put downward pressure on Sterling, but such a signal is unlikely to emerge. Instead, BoE is more likely to adopt a non-committal stance, waiting for incoming data and the next economic projections in May before making a firm judgment.

Concurrently, SNB is expected to hike by 50bps to 1.50%. Market expectations suggest a possible 25bps hike in June to a terminal rate of 1.75%, followed by a pause. However, the SNB's comments and projections could reshape these expectations.

Here are some previews for BoE and SNB:

· UK Inflation Will Strengthen the Hawks

· BoE Rate Decision: One Last Hike Before Hitting Pause?

· BoE Preview: 25 bps Hike and Done?

· Bank of England Preview – Final Hike in Store

· Bank of England & Swiss National Bank Both Set to Hike

· Will the SNB Roil Markets With a Hike Amid Credit Suisse Crisis?

GBP/CHF is still bounded in medium term sideway consolidation from 1.1574. Outlook is kept bullish as the crosses quickly recovered after breaching 38.2% retracement of 1.0183 to 1.1574 at 1.1043 briefly. A break through 1.1574 resistance to resume the rise form 1.0184 is expected. But that might not happen today, unless there is some drastic surprise from BoE or SNB. Euro Leads Gains as Dollar Struggles Post-FOMC; BoE and SNB Decisions Take Center Stage_4

Euro Leads Gains as Dollar Struggles Post-FOMC; BoE and SNB Decisions Take Center Stage_4

EUR/USD Daily Outlook

EUR/USD's rise from 1.0515 accelerates higher and intraday bias stays on the upside for retesting 1.1032 high. Decisive break there will resume whole up trend from 0.9534 and target 1.1273 fibonacci level next. On the downside, below 1.0787 minor support will turn intraday bias neutral and bring consolidations first, before staging another rally.

Euro Leads Gains as Dollar Struggles Post-FOMC; BoE and SNB Decisions Take Center Stage_5

In the bigger picture, rise from 0.9534 (2022 low) is in progress with 38.2% retracement of 0.9534 to 1.1032 at 1.0460 intact. The strong support from 55 week EMA (now at 1.0623) was also a medium term bullish sign. Next target is 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273. Sustained break there will solidity the case of bullish trend reversal and target 1.2348 resistance next (2021 high).

Source: ActionForex.Com

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Samantha Luan

Forex

Despite the recent turmoil in the US banking system the Federal Reserve went ahead and raised rates by 25bps at its meeting last night.

While this was broadly in line with expectations, a tweak to the statement was perceived to be more dovish, moderating the language by removing the reference to "ongoing increases will be appropriate", with "some additional policy firming may be appropriate".

This helps to give the Fed wriggle room to pause at the next meeting if the data permits, as well as indicating that the end of rate rises could be close.

This change saw yields, as well as the US dollar fall sharply, however, US markets after initially pushing higher also fell back and closed lower, after comments from US Treasury Secretary Janet Yellen, in separate comments to US lawmakers, said that there was no commitment to extending banking deposit insurance beyond the current $250k cap.

Powell also admitted that a rate pause was considered due to the banking crisis, while also going on to say that the prospect of rate cuts this year was not being considered. A cursory analysis of the latest dot plot chart confirmed that thought process, even as markets continued to price that very possibility.

With US markets closing sharply lower after Yellen's comments, European markets look set to pick up on that negative read across, with a similarly weaker open.

Before yesterday's hotter-than-expected UK CPI number for February, the main question facing UK markets was how close the Bank of England was to its terminal rate, and whether recent events across the banking sector would temper its decision to raise rates today.

That question got a whole lot more complicated yesterday with a surprise surge in headline CPI in February to 10.4%, driven primarily by food and services prices. What was even more worrying for the central bank was that core prices also surged higher, rising from 5.8% to 6.2%, and undermining the recent narrative from MPC officials that inflation was on its way back down again.

The MPC has remained split in recent months split with Tenreyro and Dhingra both opposed to further rate hikes even with headline CPI still above 10% and core prices now on the rise again at 6.2%, and wages at 6.5%.

Back in February Bank of England governor Andrew Bailey insisted that the MPC was seeing "powerful downward forces on inflation now" when he testified to the Treasury Select Committee, saying that "I do think we have turned the corner".

Those comments haven't aged well even if he did caveat them with concerns about inflation stickiness and serve to give the impression that the Bank of England is almost making it up as it goes along.

Bailey followed up those February remarks with further comments at the start of this month saying he had not seen any data to justify markets pricing in the prospect of further rate hikes insisting that markets were getting ahead of themselves in pricing a terminal rate of 4.75%.

Judging by yesterday's jump in core CPI, that is no longer the case showing that markets had a better idea of what might happen to rates than the Bank of England did at the start of the month.

The splits on the MPC while welcome in the context that there isn't a groupthink consensus also serve to give that impression, especially when you have two policymakers leaning away from hikes, and more towards rate cuts at some point in the future. Earlier this month Swati Dhingra was claiming that there was no evidence of persistent cost-push inflation becoming embedded and that inflation would fall back sharply over the rest of the year. That claim is hard to square with monthly price rises in excess of 1%, on both CPI and RPI inflation measures.

On the other side of the spectrum, you then have external MPC member Catherine Mann making the case that more hikes are warranted given stickier inflation dismissing the idea of a pivot to a looser policy. She also went on to insist that rates would likely have to stay higher for longer in order for inflation to return to target.

Mann's stance seems entirely more credible than the dovish stance of Tenreyro and Dhingra given how stickier UK inflation has always tended to be historically. This is mainly down to the transmission mechanism of a weaker pound, which tends to put a floor under prices.

While some have suggested the Bank of England might pass up on another rate rise today, most sensible people think that at the very least we can expect to see another rate hike of 25bps after yesterday's inflation numbers, although we could well see another split decision. It would be a huge surprise if we got no change and would hammer yet another nail in the central bank's credibility when it comes to its inflation-fighting credentials.

Before the Bank of England, we have the latest rate decision from the Swiss National Bank, who are expected to raise rates by 50bps to 1.5%, despite the recent turmoil in its own banking backyard with the shotgun marriage of Credit Suisse with UBS. It will be interesting if policymakers there have any postscripts to recent events in terms of their guidance around further rate increases.

EUR/USD – moved through the 1.0800 area and looks set for a retest of the recent range highs at 1.1030. Support should now come in at the 1.0760 area, with stronger support at the March lows at 1.0520.

GBP/USD – continues to struggle to push through the 1.2300 area despite a brief push up to 1.2335 yesterday. The pound continues to feel vulnerable to slipping back especially given that the Bank of England tends to lean towards dovish language when it does meet. Currently have support at 1.2170.

EUR/GBP – feels like we could see a move towards 0.8900 where we have resistance. Still have strong trend line support at 0.8720, from the lows last August. Support also at 0.8780.

USD/JPY – ran out of steam at the 133.00 area and support at 131.00. Below 130.80 targets a return to the 130.00 area.

Source: CMC

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Owen Li

Stocks

The end of the Federal Reserve's bruising rate hiking cycle may be in sight, yet investors are finding plenty to worry about when it comes to the U.S. stock market.

In its first meeting since the collapse of two U.S. banks this month and the downfall of ailing European lender Credit Suisse, the Fed on Wednesday raised interest rates by a quarter of a percentage point and indicated it was on the verge of pausing further increases in borrowing costs.

It was a message long awaited by many investors, after the S&P 500's fall by nearly a fifth last year as the Fed launched its most aggressive monetary policy tightening cycle since the 1980s. Yet some fear the rapid rises in rates are only starting to ripple through the U.S. economy, and remain wary of jumping into stocks amid banking sector turmoil, a downbeat outlook for corporate profits and a looming recession.

"Macroeconomic policy and the outlook for the economy is more complicated than it was two weeks ago," said Anthony Saglimbene, chief market strategist at Ameriprise Financial, who is holding a lighter than normal equity allocation.

"In that highly uncertain environment, you need to navigate it by being a little bit more cautious and a little bit more defensive," he said.

Stocks fell on Wednesday, with the benchmark S&P 500 closing down 1.65% after swinging between gains and losses during Fed Chairman Jerome Powell's press conference following the meeting. The Nasdaq Composite lost 1.6%.

Adding to the market unease were comments from Treasury Secretary Janet Yellen, who told lawmakers on Wednesday that the Federal Deposit Insurance Corporation (FDIC) was not considering "blanket insurance" for deposits arising from recent strife in the sector.

Banking industry stress could trigger a credit crunch with "significant" implications for an economy that Fed officials projected would slow even more this year than previously thought, Powell said.

Analysts at Capital Economics, who believe a recession is likely this year, wrote: "While ... the exact impact of the banking turmoil is uncertain, we are now more confident that the Fed's forecasts for economic growth will prove too optimistic."

Meanwhile, though the Fed's latest policy statement no longer said that "ongoing increases" in rates would likely be appropriate, Powell said that inflation remained well above the Fed's goal and that policymakers were unlikely to cut rates this year, an outlook at odds with that of many investors.

Futures markets are now pricing a Fed funds rate of around 4.25% by year-end, compared with the range of 4.75% to 5% that took effect on Wednesday.

"Sure equities would like a Fed pivot or a point that the Fed would slow down rate hikes, which I think is what they got," said Charlie Ripley, senior investment strategist at Allianz Investment Management, who has recently increased his allocation to cash. "Powell also said he doesn't view that rate cuts are plausible at some point this year, so this whole higher-for-longer theme is likely what's playing out."

Uncertain outlook

Stocks have been resilient this year in the face of uncertainty, with the S&P 500 up 2.5% since the end of 2022.

Many investors' portfolios remain light in equities, a market condition some view as a positive for stocks because of the potential for powerful buying when the market mood shifts. Deutsche Bank's measure of aggregate equity positioning saw its biggest drop in 15 months last week, the bank's strategists said in a March 17 note.

A drop in Treasury yields from recent highs has also given a tailwind to stocks, especially to big tech and growth names that are heavily weighted in the S&P 500. Yields move inversely to bond prices.

Still, some investors believe yields may head higher again. Sonal Desai, chief investment officer of Franklin Templeton Fixed Income, said she was skeptical about the recent rally in Treasuries, because inflation remained high.

"I think there's more volatility to come, without a doubt," said Desai, who expects the benchmark U.S. 10-year yield will rebound to 4% this year from its current 3.45%.

Corporate profits are another potential trouble spot, with S&P 500 earnings expected to post year-over-year declines in the first and second quarters after falling 3.2% in the fourth quarter of 2022, according to Refinitiv IBES.

That may not even fully reflect the fallout from a potential slowdown brought on by the banking crisis, should lending slow, as many analysts now expect.

"I don't think the market is going off to the races," said James Ragan, director of wealth management research at D.A. Davidson. "There is going to be some pressure on earnings going forward."