On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Investment Strategy Analyst BeiChen Lin discussed key takeaways from the Bank of England (BoE) and the U.S. Federal Reserve (Fed)’s recent policy meetings. They also unpacked the latest developments surrounding equity-market volatility in China.
BoE, Fed lift interest rates by 0.25%
At their respective policy meetings the week of March 14, both the BoE and Fed announced a 25-basis-point increase in their key lending rate, Eitelman said, noting that the decisions were expected by financial markets. “Both central banks are clearly concerned about soaring inflation—which has reached the highest levels in decades in both countries—and have shifted to inflation-fighting mode,” he remarked. In the U.S., the rate increase was the first since late 2018, while in the UK, the rise in borrowing costs marked the third straight by the BoE since last December, Eitelman noted.
Zooming in on the BoE’s decision, Eitelman said that although the UK central bank is still conveying a tightening bias moving forward, it may be challenging for it to maintain a pace of sequential rate hikes for the rest of the year. Why? “Utility bills for consumers have already jumped amid the Russian invasion of Ukraine, and the UK government also appears likely to move ahead with a planned payroll tax increase in the spring,” he explained.
In Eitelman’s opinion, the Fed probably stands a better chance of being able to deliver on a protracted sequence of rate hikes, since the U.S. economy will likely be less affected by the energy-supply issues impacting European markets. In addition, rapid wage growth, a tight labor market and broadening price pressures in the U.S. have ratcheted up the Fed’s level of concern over inflationary risks, suggesting that the central bank will continue to raise rates in order to aggressively combat inflation, he stated. As proof, Eitelman noted that the Federal Open Market Committee (FOMC) penciled in six additional rate hikes through the end of 2022 at its March 16 meeting, with some FOMC members favoring even more.
He stressed that for investors, it’s important to understand that many of these moves have already been priced in pretty aggressively by markets. “The expectation for tighter monetary policy this year was a fairly big issue that drove volatility in January and February, but from my vantage point, it now looks like a maturing risk factor going forward,” Eitelman said, adding that this would be a positive for markets if it proves to be the case.
China responds to stock-market volatility
Shifting to China, Eitelman said the week of March 14 was packed with many noteworthy developments for the world’s second-largest economy, including the emergence of the worst COVID-19 outbreak since early 2020.
“Surging infections in the city of Shenzhen led to lockdowns and the closure of several factories—and that was pretty bad news on the economic front, as this area is responsible for approximately 3% to 4% of China’s GDP (gross domestic product),” he explained. This helped trigger a sharp selloff in Chinese equities on March 15, Eitelman said, deepening the month’s losses for several mega-cap tech companies.
However, these negative developments did appear to catch the attention of policymakers by mid-week, he noted. “On March 16, China’s Financial Stability and Development Committee signaled an urgent need to boost the nation’s economy, and basically encouraged local governments to actively introduce policies that would benefit Chinese markets,” Eitelman explained.
This was a very important and potentially encouraging development, he said, noting that equity markets rebounded strongly on the news, with Hong Kong’s Hang Seng Index gaining 12.5% the day of the announcement. “This was almost double the largest daily move the index had seen previously, in data stretching back to 2004,” Eitelman remarked. Ultimately, while there are some pretty significant risks in China at the moment, it’s encouraging to see the government stepping in to cushion things, he said.
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