- To pause or not to pause is the question facing Fed policymakers this week.
- Forecasts are for US interest rates to be kept on hold, due to data indicating economic slowdown.
- Expectations that the end to the hiking cycle is near has helped push US stocks into bull market.
- Japan’s central bank poised to keep monetary policy unchanged, while the ECB is forecast to hike rates this week.
- UBS completes unpalatable purchase of Credit Suisse with the digestion of banks assets set to be slow and potentially painful.
- Oil prices knocked back by more cautious sentiment ahead of central bank decisions.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’To pause or not to pause – is the big question investors are mulling about the intentions of Fed policymakers ahead of the crunch meeting this week. The Federal Open Markets Committee will make their interest rate decision known on Wednesday. They’ve taken up arms against a rising sea of inflation by hiking rates at the fastest pace in 40 years, but with signs that the economy is shuffling off into a potential recession, the expectation is that they are likely to keep rates on hold.
The latest inflation data out on Tuesday could sling another arrow of uncertainty into investors’ minds if headline inflation doesn’t head down quite as fast as expected, and core inflation, stripping out energy and food prices stays elevated. But with signs the mighty services industry is slowing, with the ISM Services PMI index showing growth tailing off, it has added to expectations that the Fed will take a pause this week and assess the economic currents. Any deviation from the forecast path is likely to cause a jolt of volatility on markets, after the risk-on appetite has grown markedly. The S&P 500 has trotted into a bull market, up 23.1% from its October high, pushed up by optimism that the interest rate cycle is ending. The rally has been led by Big Tech and, in particular, a frenetic interest in AI related stocks.
While a pause is being factored in for the Fed, European central bank policymakers are not expected to veer away from the path of rate hikes, anxious that inflation still risks becoming embedded in Eurozone economies. The ECB is forecast to hike rates by 0.25% on Thursday with another rise being penciled in for July, despite signs of slowing growth and Germany dipping into recession. The Bank of Japan is expected to keep rates on hold this week, and its loose monetary policy intact, as wholesale inflation slowed for a fifth consecutive month.
UBS has finally swallowed Credit Suisse, creating a Swiss megabank with more than $5 trillion in invested assets, but it’s set to be an unpalatable development for thousands of staff who will be to be bracing for job cuts. Although Credit Suisse was snapped up for just 3.4 billion dollars, a bargain basement price for a what was a sprawling global bank, UBS has estimated it could face a potential financial hit of around $17 billion, citing that the rushed nature of the deal could have affected its due diligence. However, a deal reached with the Swiss government at the end of last week for it to guarantee up to $10 billion in losses it may face, as it sells off chunks of Credit Suisse’s assets, will have sweetened the deal.
Even so, there are likely to be some painful bouts of indigestion ahead in attempting to neutralize Credit Suisse’s troubles with its operations set for losses for the whole of this year. Becoming a mega bank at such speed, with two different cultures colliding will be far from easy. Integrating operations is set to spark significant job cuts, will necessitate the tricky transfer of IT systems and will see chunks of riskier parts of the business sold off. But worries about how UBS will handle the takeover are being dismissed by management, who are pointing to the opportunities the deal will present over the longer term, and certainly it does give UBS immediate access to wealth management markets which had been harder to reach.
Oil prices have headed south, as caution remains about demand in the global economy as the lag effect of interest rate hikes in key markets feed through and worries persist about China’s uneven recovery. Brent crude futures have fallen to around $74 with the effect of Saudi Arabia’s production cut evaporating.”
