Markets Wrap (13–28 March)

Macro

US and European business sentiment indicators have proven to be resistant so far. Preliminary March euro area industry sector PMI was somewhat worse than predicted by most analysts, but services sector index beat the median forecast by a wide margin. In the US, both indicators were better than expected (Chart 1).

US consumer confidence is another indicator that is holding up surprisingly well despite rising interest rates – March Conf. Board Consumer Confidence index rose to 104.2 points – up from 102.9 points in February and higher than Bloomberg median forecast of 101.0 points.

Central banks

The FED lifted key rates by 25 bps (to 4.75-4.5%) at its March meeting despite a sudden increase of the stress level in the financial system following a failure of several regional banks. Based on interest rate futures, the market seems to think that this was the final hike in the tightening cycle and expects two full cuts by the end of 2023. As implied by futures pricing, the ECB should raise the rates two more times before loosening its stance (Chart 2). 

The Bank of England delivered another interest rate hike, bringing the key rate up by 25 bps to 4.25%. In February, price growth in the country (CPI 10.4%, core inflation 6.2% y-o-y) not only exceeded expectations (Bloomberg median forecast at 9.9% and 5.7% respectively), but also accelerated following four straight months of decline (Chart 3). Governor A. Bailey later noted that the key rate is unlikely to reach the level seen before the global financial crisis (5.75% at the peak), but the central bank stands ready to tighten more in inflationary pressures persist.

Norges Bank increased the base rate from 2.75% to 3.0%. The move had been anticipated by the market following a clear guidance by the central bank, as it had to re-start the tightening cycle due to faster than expected price growth. Based on the updated Norges Bank interest rate path (Chart 4), two more hikes are to be expected in May and June meetings. Although weak krona is among the main reasons behind inflationary pressures, the central bank did not mention the possibility of targeting the exchange rate.

Interest rates

The recent signs of distress in the banking system caused a swift repricing of interest rate expectations. Over the 6-month period prior to March, the maximum 3-month Euribor rate that was priced-in by the market rose from 4.0 to 2.5%. Since the beginning of March, however, it fell by 0.5 pp (to 3.5%) on hopes that the ECB will scale down its tightening agenda due to an elevated level of risks to the economy (Chart 5). 

Around a year ago, FED's chair J. Powell underscored the difference between current and future short-term interest rates as his preferred indicator of upcoming troubles for the economy. The difference between current and 18-month future Treasury bill rates is now below -100 basis points (Chart 6), which is close to the level seen in January 2001 – two months before the US economy fell into a recession. It means that the market is all but certain about an upcoming economic downturn.