Weekly financial market update - 27th of March 2023
Written and accurate as at: Mar 27, 2023 Current Stats & Facts
Last week was a turbulent one, with news reports focusing on concerns about the global banking system. Regulators tried to reassure investors about the possibility of a wider liquidity crisis, but this uncertainty still loomed large. Despite these concerns, the US Federal Reserve, European Central Bank, and Bank of England all raised interest rates in an effort to combat high inflation. These central banks will continue to address financial stability and price stability as separate issues, using different measures.
The stress is expected to hit smaller and mid-sized US banks, leading to stricter lending standards and reduced credit availability. Some estimates suggest this could create a 0.25-0.5% drag on US GDP growth, which is equivalent to 25-50 basis points of rate hikes.
This upcoming week will see the release of domestic retail sales data for February on March 28th, and monthly CPI data for February on March 29th. These figures are important to determine whether the RBA will pause at its next board meeting in early April.
KEY MARKET DRIVERS
Key market drivers include the continued volatility as regulators try to calm markets over potential liquidity crises in the banking sector. Investors remain cautious about further fallout. Despite instability, central banks like the US Federal Reserve, European Central Bank, and Bank of England raised interest rates to tackle high inflation, treating financial and price stability as separate issues.
The RBA's potential rate hike in April is uncertain, with recent minutes suggesting a pause might be considered based on upcoming economic data. Stress on small and mid-sized US banks is expected to tighten lending standards and impact credit availability, potentially dragging US GDP growth.
While Federal Reserve Chair Powell doesn't expect rate cuts in 2023, markets continue to bet against this view. The market's assumed path for rate cuts is aggressive, especially considering the persistent elevated inflation.
US Treasury Secretary Janet Yellen initially alarmed the market by stating that regulators were not prepared to provide a blanket deposit guarantee. She later clarified the government's stance, assuring that US deposits are safe, and a significant expansion of deposit insurance is not necessary, but they are ready to take additional actions if required.
MACRO / ECONOMIC NEWSFLOW
The US Federal Reserve increased its target rate by 25 basis points to a range of 4.75-5.00%. Uncertainty led to a softened tone regarding the magnitude of future rate hikes, while the updated 'dot plot' still indicates a median expectation of a ~5.1% peak cash rate.
The Bank of England raised rates by 0.25% to 4.25%, following an unexpected increase in annual headline inflation from 10.1% to 10.4% in February (9.9% forecast). Food costs rose 18% year-over-year, the highest in over four decades. Core inflation remains well above target at 6.2% (previously 5.8%).
US jobless claims remain low, indicating a tight labour market. Layoffs in higher-paid sectors like tech and finance continue but may not be reflected in claims data due to severance pay or sufficient savings eliminating the need to file for unemployment benefits.
US Services PMI rose to 53.8 in March 2023 from 50.6 in February, surpassing market expectations of 50.5. This marks the fastest output growth since April 2022. New orders increased for the first time since September, and at the quickest pace since May 2022. Meanwhile, US Manufacturing PMI increased to 49.1 in March from 47.3 in February, beating forecasts of 47. Inflationary pressures eased as supplier price hikes moderated and some raw material costs stabilised.
In summary, last week was marked by significant volatility in the financial markets, with concerns about the global banking system taking centre stage. Regulators tried to calm investors, but uncertainty remains. Despite this instability, central banks like the US Federal Reserve, European Central Bank, and Bank of England raised interest rates to address high inflation. However, stress is expected to hit smaller and mid-sized US banks, which could impact lending standards and credit availability, and drag on US GDP growth.
This week, economic data releases including retail sales and monthly CPI figures will be closely watched to determine the RBA's decision in early April. Market drivers and macroeconomic news flows will continue to impact financial markets, and investors will be monitoring developments closely. Despite the challenges, some positive news was reported, such as the increase in US Services PMI, indicating the fastest output growth since April 2022, and the moderation of inflationary pressures in the manufacturing sector.
MAJOR SHARE PRICE MOVES - S&P/ASX 200
Evolution Mining +14.3% Share price responded positively to news that it had commenced underground production 3 months ahead of schedule at its Cowal operations in NSW
Perseus Mining +9.9% Gold stocks continue to rally on macro uncertainty, the All Ordinaries Gold Index was +7.8% this week, with the USD gold price up a further +0.6% (+8.4% MTD)
Newcrest Mining +8.5% Combination of the continued rally in the broader gold sector, but also some talk around the possibility of a sweetened offer by Newmont after gaining data room access
Polynovo -13.0% Chairman sold ~20% of his holding during the week
Sayona Mining -15.9% Trading below the $0.315 price at which it raised $55m to advance its Quebec
Lithium projects. The first production occurred, but not yet at target quality levels
Block Inc -20.8% Share price fell sharply following the release of a short-seller report that alleges Block is inflating its genuine user metrics and understating customer acquisition costs