- Brent crude hit $72 a barrel amid global economy worries but pares back some losses.
- Fed raises rates by 0.25% and indicates hiking cycle may be at an end, but rates look set to stay elevated.
- US banking worries remain as PacWest shares plummet more than 50% in afterhours trading.
- European Central Bank rate hike decision in focus with a 0.25% hike expected.
- Next stays cautious and warns second quarter sales may decline by more than expected.
Oil Price Falls
Worries are swirling that persistently high interest rates could be like a sledgehammer descending on the US economy, to try and crack the nut of stubborn inflation.
This concern has pushed down the oil price again, reflecting traders’ assessment that demand for energy will shrink globally if the US is pushed into a deeper recession than expected, amid softening demand elsewhere in the world.
Brent crude slid to $72 a barrel during early trade in Asia, dropping 11% this week as fears were fueled about a slowdown, although some losses were recouped later in the session.
With Germany’s exports falling by more than expected in March, coming on top of China’s slowdown in manufacturing activity, the picture is already being drawn of lower demand for goods around the world. Exports to the US fell by 10.9% and shipments to China dropped by 9.3%.
Fed Raises Rates
The latest interest rate increase from the Fed came as expected, and even indications that the hiking cycle may be at an end, hasn’t calmed worries about the effect of the rapid tightening of monetary policy on the US.
Casualties of high interest rates have already fallen in the banking sector, as portfolio losses have mounted, and depositors have taken fright.
Confidence is leaking fast from regional lender PacWest Bancorp (NASDAQ:PACW) after it confirmed it is looking at ‘strategic options’, increasing concerns that the banking crisis could take another turn for the worse. Investors are worried that it will be the next domino to fall as worries swirl about deposit flight and the lack of asset diversification among smaller lenders.
Although Fed chair Jerome Powell noticeably didn’t say more tightening might be appropriate indicating policymakers are ready to press the pause button, stocks still slid on Wall Street as hopes that a rate cut might come before the end of the year faded.
It’s clear inflation is still not coming down as fast as policymakers hoped. The lag effect of the rate rises and an expected crunch to credit is expected to weigh more heavily on demand in the months to come, but gaging the pressure right now is difficult.
It looks like the hiking cycle in the US is now at an end, but the door to another rise is still slightly ajar, just in case, and that’s still causing nervousness given that rates are already at the highest level for 16 years.
ECB Expected To Hike Rates
Focus is now switching to the European Central Bank decision later today with a 0.25% hike to 3.75% expected as eurozone economies grapple with stubborn inflation. The signals the bank sends about the number of future rate increases will be closely watched.
The ECB is behind the curve compared to the Fed and also the Bank of England, while prices are still in flight, moving disappointingly higher at the last snapshot.
Escalating inflation is punishing households, and making the prospects for intense civil unrest more likely, a scenario which won’t be lost on France’s Macron, who is struggling to contain angry protests over curtailing workers’ pensions.
With the cost-of-living crisis showing little sign of abating yet in the UK, it’s no surprise that NEXT plc (LON:NXT) is staying cautious on the outlook. The trend for making do, rather than splashing out on expensive new outfits is expected to stay in vogue as budgets are hit by tax hikes and eye-wateringly high food prices.
Although full price sales fell 1.2%, performance overall was a bit better than expected, as customers snapped up bargains on the reduced rails with clearance stock in demand. Total trading sales were up 1.2% compared to last year when stock shortages limited clearance items.
There is likely to be disappointment though that sales guidance for the second quarter has been shifted downwards, with a fall of 0.5% expected rather than 0.4%.
The pent-up demand for new outfits to go out again post-pandemic has evaporated, while last year’s sunshine burst has been replaced by cloud cover this year, reducing the chances of wardrobe refreshes for the summer.”
Article by Susannah Streeter, head of money and markets, Hargreaves Lansdown