Market Overview

With inflation down from its peak and a credit crunch looming, Central Banks on both sides of the Atlantic have slowed the pace of the rate hikes and peak borrowing rates are nearing.

The US Federal Reserve raised rates by 25 bps at its latest FOMC meeting bringing the Federal Funds Rate to 5.25% from 5%. The language of Fed officials and US Federal Reserve Chair Powell indicated that future decisions would be on a meeting-by-meeting basis and inflation, labor market and credit conditions would factor into future policy decisions. Powell noted that the labor market was still tight and it was still uncertain how much the reduced lending from banks would impact the economy. The Fed would continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities as planned. The central bank would work to strengthen supervision and regulation for mid sized banks and its essential for debt ceiling to be raised and that a US government default could have adverse effects.

The ECB also raised interest rates by 25 bps with ECB President Christine Lagarde warning that the fight against inflation was not over and the market expects two further hikes of 25 bps to raise the deposit rate from 3.25 to 3.75 by July this year- the highest ever level since 2001. Borrowing costs could result in a credit crunch which was the impetus to reduce the pace of rate hikes from 50 bps to 25 bps and its expected that the peak in Eurozone borrowing costs is not far away.

The sale of First Republic to JP Morgan was finalized on Monday ending the turmoil around the crisis of confidence in March- the failure of First Republic the second largest in US banking history after Washington Mutual in 2008. The calendar for the week includes inflation data and employment data release in the US and BoE interest rate decision.

Commodities, FX and Bonds

Crude oil prices fell for the third week in a row in response to expectations of weakening US economy and slowing demand in China. The strengthened US dollar after ECB raised rates yesterday further put a damper on oil prices as a stronger greenback makes crude more expensive for buyers holding foreign currency. Rates on longer maturities have fallen in anticipation that the US Fed and ECB would soon pause the rate hike schedules in response to tighter economic conditions. The Hong Kong Monetary Authority (HKMA) raised its main policy rate in response to US Fed rate hike. Weakness in its pegged currency forced the central bank to deplete banking system cash to 15-year lows and brings banking liquidity to 2008 levels underscoring the effect of the US rate hike schedule on the international financial system. 

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