Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.
Eurozone Market Update
In June, the ECB raised interest rates by 25 bps, taking the deposit rate to 3.5%. The Governing Council also confirmed discontinuing the asset purchase programme (APP) reinvestment in July. Annual Eurozone core inflation rose to 5.4 from 5.3 but printed below consensus. Eurozone composite PMI fell to 50.3, 2.2 points below expectations, dragged lower by manufacturing and services. Eurosystem staff projections provided a hawkish tilt with inflation expectations revised higher, indicating core inflation will remain above target until the end of 2025. President Lagarde provided strong forward guidance that barring a material change, rates will likely rise in July. While there is no wage price spiral, Lagarde highlighted unit labour costs were a critical driver of the upward inflation revisions.
Euro Short Term Rates
Source: Bloomberg, data as at 30 June 2023
UK Market Update
The BoE increased the policy rate by 50 bps in June to 5%. This surprised markets as many believed the Bank would wait until August for more aggressive action and use June’s meeting to prepare the market for the step back up to 50 bps. However, considering the recent upside surprises in wage growth and core inflation, most can rationalise the decision to be more assertive (see Chart of the Month). While emphasising the BoE is not signalling future rate decisions, Governor Andrew Bailey stressed that the current levels of wage increases cannot continue. Indeed, the labour market remained robust and wage data continued to print above expectations. Inflation also continued to surprise on the upside, with annual headline (8.7%) and core (7.1%) CPI beating expectations of 8.4% and 6.8%, respectively.
GBP Short Term Rates
Source: Bloomberg, data as at 30 June 2023
US Market Update
June saw the Fed pause its rate hikes, maintaining the Fed Funds target range of 5% to 5.25%. Federal Open Market Committee (FOMC) participants hinted at a pause to assess the cumulative impact of monetary policy tightening, despite a strong labour market and still unacceptably high inflation. The ‘Dot Plot’ of median FOMC expectations showed 50 bps of additional hikes by year-end, and 100 bps of cuts starting in 2024. Chair Jerome Powell posited that while monetary policy tightening had “covered a lot of ground…the full effects…are yet to be felt.” Powell clarified that he expects the July FOMC meeting to be ‘live’ for potential hike and clarified that a “pause is [a] continuation of moderating [the] pace of hikes.”
USD Short Term Rates
Source: Bloomberg, data as at 30 June 2023
Looking Ahead
While the FOMC, ECB and BoE delivered harmonised 25 bps hikes in May, the split between no hike, 25 bps and 50 bps in June showed that while they may still be on the same path, we could be entering a period of divergent policy increments. Central banks remain hawkish across the board as elevated core inflation continues to be their main focus. The BoE’s position is particularly precarious, as its core inflation momentum has caused the market to reprice the UK’s peak policy rate significantly. Wages are the key driver of core prices, with the BoE expressing caution about a wage price spiral, and the ECB mentioned the possibility of one. We maintain that the market is too optimistic about rate cuts in 2024 and should focus more on the persistence of tight monetary policy.
Chart of the Month: UK markets show resilience to high interest rates
LDI = Liability Driven Investing
SONIA = Sterling Overnight Index Average
Source: Bloomberg, data as at 30 June 2023
Sign up to the Liquidity Link Newsletter
Latest News & Insights Across Global Liquidity Markets
Northern Trust Asset Management welcomes you to the full Liquidity Link Newsletter, our monthly publication offering timely updates on the UK, Eurozone and US markets - along with the latest:
- Videos
- Webinars
- Thought leadership (including blogs, articles and case studies)
IMPORTANT INFORMATION
For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors.
The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc (NTI) or its affiliates. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust Asset Management’s (NTAM) and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.
Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2A of the Form ADV or consult an NTI representative.
Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the benefit of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over-compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of NTAM.
This information is intended for purposes of NTI and/or its affiliates marketing as providers of the products and services described herein and not to provide any fiduciary investment advice within the meaning of Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). NTI and/or its affiliates are not undertaking to provide impartial investment advice or give advice in a fiduciary capacity to the recipient of these materials, which are for marketing purposes and are not intended to serve as a primary basis for investment decisions. NTI and its affiliates receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing and other services rendered to various proprietary and third party investment products and firms that may be the subject of or become associated with the services described herein.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, , Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.
