Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.
Eurozone Market Update
February’s more forceful language from the ECB brought an expected 50 bps hike to 2.5%. Another 50 bps will follow in March. There has been a major market repricing, taking out the wrongly anticipated rate cuts.
Europe had unexpectedly strong February Purchasing Managers Index (PMI), employment and wage data — raising hopes of avoiding a technical recession. But inflation remains far above target.
February’s €36.6 billion in targeted longer-term refinancing operations (TLTRO III) early repayments were at the lower end of the market forecast (€35 billion to €100 billion). These had little impact, but the market believes there could be a very large repayment in March as it represents the last window to repay before the June expiration of TLTRO III. This may see many banks paying back most of their remaining TLTROs.
UK Market Update
The main ‘shock’ for February’s tenth consecutive rate hike (50 bps) was the MPC voting split — with a 7-2 split for 50 bps and 0 bps, respectively. Market interpretations that the peak is near and that cuts will follow from June were wrong-footed. Figures for the UK growth rate point to a narrowly missed ‘technical recession’. Jobs growth significantly overshot expectations. February’s PMI data proved resilient, with a rise from 48.5 to 53.0 despite expectations that the cost-of-living crisis would see services declining.
The economy is more robust than the market expected. Overly strong employment data suggests neither a hard- nor a soft-landing recession. Instead, a ‘no-landing’ of low but positive growth will likely be sustained. Pricing is now based on BoE rates being kept tighter for longer, with a higher peak possible.
The Chart of the Month shows how much the total priced in for the year has changed in response to stronger data. It represents the cumulative impact of policy.
US Market Update
The FOMC raised its policy rate by 25 bps. Chair Jerome Powell noted that progress has been made in lowering inflation, but he emphasised that more needs to be done ¬— and further rate increases will be necessary to restore price stability. He doesn’t expect rate cuts this year and reiterated that it is more difficult to manage the risk of not tightening enough than that of tightening too much.
Market data throughout February supported this view, with headline inflation rising by 0.5% and core inflation by 0.4%, while year-over-year inflation numbers moved to 6.4% and 5.7%, respectively. The tight labour market continued, with non-farm payrolls increasing by 517,000 (versus 188,000 expected) and consumer spending showing no signs of slowing, with retail sales up 3%. Given the data and continued hawkish comments from Fed members, Fed funds futures moved the terminal rate to 5.4% and priced in three additional hikes in 2023.
Global Outlook
The month started with the FOMC raising its policy rate by 25 bps, and the BoE and ECB followed by hiking 50 bps. Yet the market continued to enforce its ‘pivot’ narrative. As the economic data released during February evolved, the market was forced to re-examine its stance. This led to a repricing of peak interest rate expectations, a significant reduction in expectations for 2023 rate cuts and expectations of 2024 cuts pushed further out.
We believe the market’s rate expectations are now more plausible and aligned with our long-held view that once the central banks reach their peak rates, there will be a prolonged pause. We continue to closely scrutinise the central banks’ narratives. If dovish data emerges, central bank rate pauses will be followed by a period of assessment and then action; previously priced-in cuts clearly jumped the gun.
Chart of the Month: Data Forces Re-Examination of Market’s Expectations
Source: Bloomberg. As of 28/02/2023
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)
For Europe and Asia-Pacific 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 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 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, and its accuracy and completeness are not guaranteed. 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. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.
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.
Forward-looking statements and assumptions are Northern Trust’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.
The Northern Trust Company of Hong Kong Limited (TNTCHK) is regulated by the Hong Kong Securities and Futures Commission. In Australia, TNTCHK is exempt from the requirement to hold an Australian Financial Services Licence under the Corporations Act. TNTCHK is authorized and regulated by the SFC under Hong Kong laws, which differ from Australian laws. In Singapore, The Northern Trust Company of Hong Kong Limited (TNTCHK), Northern Trust Global Investments Limited (NTGIL), and Northern Trust Investments, Inc. are exempt from the requirement to hold a Financial Adviser’s Licence under the Financial Advisers Act and a Capital Markets Services Licence under the Securities and Futures Act with respect to the provision of certain financial advisory services and fund management activities.
Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc. (NTI), Northern Trust Global Investments Limited (NTGIL), Northern Trust Fund Managers (Ireland) Limited (NTFMIL), Northern Trust Global Investments Japan, K.K. (NTKK), NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC, Northern Trust Asset Management Australia Pty Ltd and investment personnel of The Northern Trust Company of Hong Kong Limited (TNTCHK) and The Northern Trust Company (TNTC). ).© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.