27th March 2023
Perspective News, The Cambridge Weekly
The Cambridge Weekly – 27th March 2023
Swiss parochialism backfires
March continues to provide investors with the opposite of the ‘steady-as-she-goes’ environment of January and February. News last week of consumer price inflation in the UK rising again, the US Federal Reserve (Fed) and the Bank of England (BoE) raising rates again, despite the banking sector fall-out of the past two weeks, and banks in Europe still fighting loss of trust pressures, proved sufficient to have stock and bond markets continue their rollercoaster ride of late.
Banking sector rout hits the little guys
The last few weeks have been a rollercoaster for investors across capital markets. Long-term fears of rate hikes, still-present inflation and potential recession set the scene for nervous market action, which then saw the collapse of several regional US banks. The US stock market corrected sharply in early March amid fears of financial contagion. But when short-term stability came in the form of a bailout for depositors of Silicon Valley Bank (SVB), fears sailed across the Atlantic, docking at the Credit Suisse headquarters. Policymakers stepped in again, temporarily calming market nerves, preventing further bank runs and stabilising credit conditions somewhat.
UK inflation shocker
Britons got an unwelcome surprise last week. Inflation, as measured by the Consumer Prices Index (CPI), climbed 10.4% year-on-year in February, higher than January’s 10.1% figure and above economists’ expectations. Before this news, things were looking better for the UK economy, albeit only slightly. Falling fuel prices, easing global input costs and a small but consistent slide in monthly inflation had suggested ‘peak’ inflation was behind us, a view even endorsed by the Bank of England (BoE). Market rumours were that the central bank might slow down or even suspend its interest rate rising cycle in response. The latest data poured cold water on those suggestions. To account for stubbornly high inflation, capital markets’ implied rates expectation moved up swiftly after the data release and correctly predicted the BoE’s actual rates increase by 0.25% on Thursday.