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Astute Market Overview - 16th May 2023



Welcome to this Astute Market Overview, covering May so far. Both last week and the previous week have been a trading day short, due to both the early May bank holiday, and bank holiday to mark the coronation of King Charles III.

Over the last two weeks, we’ve had a trilogy of interest rate decisions. The European Central Bank, who are behind the US and UK in their hiking cycle, increased rates by 0.25% to tackle inflation – this increase is half the magnitude of the recent spate of 0.5% hikes.

The Federal Reserve in the US increased their benchmark interest rate by 0.25%, to become rangebound between 5-5.25%, and later had the release of CPI inflation for April. The headline figure came in at 4.9%, lower than economist expectations. This is great news for the Fed, who are working hard to bring inflation down towards their long-term 2% targets but, of course, they won’t rest on their laurels.

And on Thursday last week, the Bank of England (BoE) increased interest rates in the UK by 0.25%, to 4.5%. Alongside the increase, they released their quarterly monetary policy report, giving us a closer insight into their thought process. The report laid out fresh inflation forecasts: they still expect inflation to fall (but not as sharply as they had previously forecast) to around 5% by the end of the year, half of the current level.

With inflation still stubbornly high (the last reading was above expectations at 10.1%), and higher than both the US and Eurozone, the BoE’s hands are tied, and it is looking like we might not be as close to the end of the hiking cycle as first thought, with the central bank hinting “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

In addition to their inflation forecasts, the BoE amended their views on recession, forecasting that we will now avoid recession altogether. Bolstering the forecast, the following day ONS data revealed that, despite a fall in March, the UK economy ultimately grew by 0.1% in the first quarter of the year.

Coming up this week, we’ll be watching developments surrounding the US debt ceiling – we’re sure that Joe Biden has a cold compress at hand, as this was a headache that he could see coming.

As the US government’s debt level reaches the debt ceiling, congressional leaders are in discussions to try and agree on a resolution. The US government needs to borrow more money to meet its obligations (for example, paying to keep libraries and schools open, paying interest on treasuries); if something doesn’t change, it has been forecast that the US could default on its obligations in early June.

In recent discussions, the democratic party (the party of the incumbent president Joe Biden) have been calling for an increase to the limit, however the opposing party – the Republicans – have been calling for conditions to be attached before they will agree.

Since 1960, congress has acted 78 times to increase, extend or revise the limit according to the Treasury, however the US government has never defaulted on its obligations.

See you next time.

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