First rate hike for the Fed

On the geopolitical front, the war in Ukraine is entering its fourth week. Bombardments are increasing, including in the west of the country on military bases close to the Polish border, a country that is part of NATO. The intensity and persistence of these attacks leave little hope for a future ceasefire or even real negotiations between the belligerents. The US recently increased its military aid to Ukraine and warned China of the consequences of any support for Russia. Joe Biden is expected in the coming days in Brussels and Poland.

There is no military de-escalation in sight, but there is nevertheless some easing on the financial markets with the rise in equity indices. The Chinese authorities sought to reassure the markets by stating that they want to make financial stability a priority, renewing dialogue with the US authorities regarding the listing of Chinese firms and suggesting that the regulatory tightening aimed particularly at large tech companies was coming to an end. China also reaffirmed its support for property developers. In addition, many Chinese companies have launched new share buyback programmes. This stream of news led to redemptions of short positions and halted the downward spiral of Chinese tech giants. Support from the People’s Bank of China is also expected to continue despite the status quo seen last week as the People’s Bank of China maintained lending rates to businesses and households.

On the economic front, new US figures remain solid. Retail sales jumped 4.9% in January and increased by 0.3% in February. The rise in prices (7.9% in February) is nevertheless weighing on consumer confidence. The labour market remains very tight, driving wages. Clearly, the Fed is targeting inflation.

The US central bank hiked interest rates by 25 basis points last Wednesday. By the end of the year, the market is pricing additional 150 basis points hikes, which would bring the Fed funds rate to 2%. The question is whether the next increases will be 25 bp or 50 bp. On Monday, Jerome Powell stated that the Fed should act “quickly” to contain too-high inflation and that it could, if the situation requires it, decide to raise rates more than usual. Thus, it will not hesitate to raise interest rates by more than 25 basis points if necessary. This is all the more credible as the Fed’s vote shows that some, such as James Bullard, are in favour of more frank rate hikes.

The Bank of England also raised rates by 25 basis points last Thursday. This is the third quarter-point since December. This morning, the figures confirm that UK inflation accelerated more than expected in February to reach its highest level in 30 years. The consumer price index (CPI) exceeded the consensus, increasing by 6.2% year-on-year last month, after an increase of 5.5% in January.

Conversely, the Bank of Japan, spared by inflation, is keeping interest rates at zero and does not intend to tighten its monetary policy. This is encouraging the yen’s weakness, which crossed the USD 120 mark on Tuesday for the first time in six years. The weaker yen against the US dollar is beneficial for exporters in the electronics and automotive sectors. The Tokyo Stock Exchange closed a 3% jump on Wednesday, with its seventh consecutive trading day in positive territory. The yen also hit a four-year low against the Australian dollar. This currency benefits from rising commodity prices. The AUD is close to 0.75 against the greenback.

After reaching an all-time high of almost $129 per barrel and then falling sharply below the $100 mark, WTI crude oil prices are back on the rise. The main drivers of oil prices are the war in Ukraine and the uptick of COVID cases in China. The war raises concerns about supply disruptions resulting from US sanctions on Russian oil and gas. The United Kingdom and the European Union have also stated that they will gradually eliminate Russian fossil fuels. As for the development of COVID in China, news of the uptick in cases has favoured a fall in prices, but it would appear that the situation is less serious than feared and that some easing is taking place.