Market Update

This week was brimming with central bank policy meetings, paralleled by cautious progress in the Russia-Ukraine negotiations regarding neutrality. These developments not only buoyed global equity markets but also moderated the surging oil prices, which dipped under $100 a barrel during the week, a stark contrast from the near $140 levels seen earlier in the month.
In the US, the Federal Reserve raised interest rates by 0.25%, which was a softer hike than the market had recently speculated. Yet, the subsequent 'dot-plot' (a visual representation of where each of the 18 Fed officials believes interest rates should head) took on a hawkish tone. It implied that officials could foresee a 0.25% rate hike in all the remaining six meetings this year. However, it's worth noting that this dot-plot isn't set in stone or even a concrete prediction; it merely reflects the current sentiments of Fed officials, not all of whom have voting rights. Given this context, we remain skeptical of such an aggressive monetary tightening trajectory.
While everyone would welcome lower inflation, we contend that drastic interest rate hikes aren't the remedy. The prevailing inflation, steered by COVID-19-induced supply-chain hiccups and commodity price surges, isn't something central banks can readily curb using interest rate tools. Simply put, hiking interest rates won't expedite oil extraction or amplify crop yields.
Furthermore, while a more palpable global inflation will surface compared to prior norms, the current "synthetic" inflationary pressures will soon transform into next year's 'base effects'. This suggests a probable decline in inflation figures once the war-related spikes in oil prices and supply chain disruptions become history.
Over in the UK, the Bank of England (BoE) raised interest rates by 0.25% to 0.75% on Thursday, 17 March 2022. While this move was anticipated due to prior indications from officials, the split 8-1 vote was noteworthy. Deputy Governor Jon Cunliffe opted to maintain the status quo, hinting that the consensus might be shifting towards our perspective: that consumers' disposable income is already strained by price hikes, and any further considerable interest rate increases are unwarranted.
Supporting our stance, the Bank of Japan (BoJ) kept its interest rates steady at -0.1% today. Moreover, Haruhiko Kuroda, the BoJ's Governor, emphasized the inappropriateness of constricting monetary policies, attributing the imminent inflation surge mostly to temporary commodity price shocks.
As we peer into next week, the agenda seems lighter in terms of economic releases. Key highlights include UK's CPI inflation, retail sales, and US durable goods orders. Additionally, Chancellor Rishi Sunak will present his Spring Statement to the House of Commons on Wednesday, 23 March 2022.