US Fed increases interest rates by most since 1994, markets struggle on the outlook for economic growth and interest rates and we see the first evidence of slowing housing inflation rates in Ireland. All these stories and more are covered in this week’s insights update from BlackBee.
Last week was an important one for the global economy with a number of big hitting central banks meeting about monetary policy. The US Federal Reserve (Fed) made the biggest splash, increasing interest rates by 0.75% – the biggest move at a single meeting in almost 30 years. The move wasn’t a complete surprise as investor expectations had quickly come around to the possibility following the previous week’s hot inflation print. The Fed’s ‘Dot Plot’ signal for the path of US interest rates also suggested that rate hikes would continue to come at regular intervals (the median estimate for end 2022 was 3.4% implying around another 1.75% of rate hikes through the end of the year – see this week’s chart of the week) although investors appeared to take some comfort from Chair Powell’s press conference comment that he did not expect moves of this magnitude to become common.
Meanwhile, the recent hawkish turn from the European Central Bank (ECB) gave rise to some of the exact policy headwinds we flagged in last week’s Insights as borrowing costs in the periphery of the region spiked, invoking dark memories of the debt crisis that plagued the region a decade before. All of this prompted an emergency ECB meeting on Wednesday where the Bank committed to combatting risks like this which in the short term at least appeared to ease investor angst.
Standing back from the headlines we believe that a sustained rapid-fire approach to tightening monetary policy in many parts of the world increases recession risks. However, this will be the case for some (the Euro area) more than others such as the US where thus far at least the economy is not presenting numerous recession signals. From an investor’s perspective, continued monetary policy tightening over the next few months suggests markets could remain volatile in the short term but if it helps eradicate excessive inflation then it may be a price worth paying for a more stable long term outlook.
Equity markets endured a turbulent week, very much overshadowed by news on inflation and monetary policy and what this meant for the outlook for economic growth. Sentiment was weaker early on as the previous week’s May US inflation report weighed on bourses there, particularly with the Fed meeting around the corner. However, investors seemed to take some solace from Chair Powell’s subsequent press conference, especially the comments suggesting 0.75% hikes would not be the norm moving forward. In Europe the volatility in borrowing costs hit some of the region’s banks hard (particularly those in Italy) with concerns rising that falls in the value of government bond investments held by these banks could have negative repercussions for the amount of capital they hold.
Bonds, like equities also suffered last week as the various central banks struck a more hawkish tone and the apparent upward path in US interest rates steepened. US ten-year bond yields rose (meaning prices fell) to their highest levels since 2018 while the moves in German government bond markets pushed yields to their highest since 2013. Given the negative performance from equity markets, credit markets unsurprisingly struggled with a steeper interest rate path giving rise to worries about the economic outlook (particularly important for lower quality borrowers) and the path for the US dollar – an important consideration for emerging economy borrowers.
Like almost all other asset classes, commodities also struggled last week. The nervousness around the impact of more aggressive interest rate increases on the economic outlook and demand for crude finally weighed on oil prices last week. Even the precious metals such as silver and gold struggled as the US dollar climbed ever higher on foreign exchange markets.
Housing – First evidence of easing house price inflation in Ireland
Last week we saw the first real evidence that the rates of house price appreciation in Ireland are beginning to moderate with the news that prices rose by 14.2% in the year to the end of April compared with 15.1% in March. We expect momentum in inflation to continue to moderate over the next few months and see interest rate increases as being a factor here. However, the Irish housing market is still one which is characterised by strong demand and acute supply shortages. As long as that remains the case, the path of least resistance for prices over the medium term remains a grinding upward one.