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Market Update Monday 17th April 2023

Investors speculate on slowing interest rates

Equity markets are set for further gains, on hopes that the Federal Reserve (Fed) and other central banks are nearing the end of their interest rate hiking cycles. Speculation that the Fed may moderate its rate rises to combat inflation was particularly high this week after the release of US producer price index (PPI) and consumer price index (CPI) figures. For producers, the price index declined unexpectedly by 0.5% for March. Two-thirds of the decline can be attributed to a 1% fall in goods prices, particularly gasoline. Whilst for households, headline CPI cooled to a 5% annualised rate in March, falling from 6% in the previous month. That said, core inflation, which strips out the more volatile food and energy price components, rose marginally from 5.5% in February to 5.6% in March in line with expectations. More than 70 per cent of traders now expect another 25-basis point raise at the Fed’s next meeting in May.

US equity markets broadly took the news positively, with the main index finishing up 1.00% over the week with the technology index up 0.65%, as of 12pm London time. In Europe markets were also strong with the European ex UK index up 1.63% after stronger industrial production, whilst the UK managed a gain of 1.88% after news that the economy narrowly avoided recession, as figures showed growth flatlining in the final quarter of 2022.
Higher returns were also experienced in Asia with the Shanghai and Hong Kong Composite rising 0.32% and 0.56% respectively. Whilst the Australian market gained 1.98%, benefitting from commodity producers in its index.

US Labour market reveals a slowing picture

Data from last Friday and this week showed further evidence that labour market conditions are gradually easing as high interest rates dampens demand in the economy. Last Friday, during the bank holiday, the Bureau of Labour Statistics showed the economy added 236,000 jobs last month, a step down from 326,000 jobs added in February, and well below the 472,000 in January. This week also saw an increase in claims for unemployment benefits, climbing more than forecast to 239,000.

German government bond yields on track for its biggest weekly rise in months.

Eurozone benchmark 10-year German bund yields, which move inversely to the bond price, is set for a rise of 19 basis points, the biggest rise since December 2022. With fears over a banking crisis fading the demand for the safe haven asset receded and the 10-year yield is trading at 2.37% as of 12pm London Time. In contrast US Treasuries were largely unchanged over the period. The 10-year US Treasury yield did fall briefly on the news of cooler inflation; however, the yield has trended back up to 3.45%, a 6-basis point rise.

Gold continues to shine.

Within the commodities space, the precious metal reached its highest price since March 2022 on Thursday. Gold trades at $2,048 per troy ounce as of 12pm London time, a rise of 1.11% over the week. The metal’s latest rally comes after Federal Reserve minutes on Wednesday indicated that several policymakers considered pausing rate increases and projected that the US would enter a mild recession later this year.

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