Indices 

The S&P 500 Index finished the week lower, despite the Friday rally, after Federal Reserve Chair Jerome Powell’s comments suggested that a shift to reducing rates may not happen as rapidly as the market had anticipated. Concerns about the need to increase the U.S. debt ceiling may also have impacted the sentiment. In a letter to congressional leaders, U.S. Treasury Secretary Janet Yellen warned that the agency may not be able to meet its debt obligations “potentially as early as June 1.” Meanwhile, the pan-European STOXX Europe 600 Index closed 0.28% lower over the five trading days ending May 5, as recession fears and banking concerns continued to weigh on investor sentiment. Major stock indices exhibited mixed results, with Germany’s DAX increasing by 0.24%, while the UK’s FTSE 100 Index declined by 1.17% in local currency terms.

Forex

Although the market experienced a turbulent week with a flurry of macroeconomic announcements and reports, the dollar ended the week with only a slight gain against the Euro. This may indicate that the market has already factored in the anticipated 25 basis point interest rate hike by both the Federal Reserve and the European Central Bank. In contrast, the Japanese Yen appreciated by more than 1% as concerns of a potential recession escalated due to the additional pressure stemming from the ongoing banking crisis.

Macro

UK:

In March, the UK housing market showed signs of stabilisation as mortgage approvals for home purchases rose for the second consecutive month, with lenders approving 52,011 mortgages, up from 44,126 in February, and the highest number since October. However, the number of home loans is still below their pre-calamity mini-budget proposal average of around 70,000 before the former Prime Minister Liz Truss caused long-term interest rates to spike, prompting lenders to withdraw funds from the market.

EU:

The ECB raised its key deposit rate by 0.25% to 3.25%, as expected, after increasing it by 0.5% three times this year. The bank also announced that it would cease its bond purchase reinvestment program by July. ECB President Christine Lagarde stated later that interest rates would need to reach “sufficiently restrictive levels” to reduce inflation to the 2% target. Although some policymakers advocated for a 0.5% increase, the Governing Council was also concerned that the banking industry’s turmoil was reducing credit availability to the economy. “Everybody agreed that increasing rates was necessary, that we are not pausing, that is very clear,” Lagarde said. “And we know we have more ground to cover.”

Official data showed that inflation in the eurozone rose to 7.0% year over year in April, up from the 6.9% recorded in March. However, the core rate, which excludes food, energy, alcohol, and tobacco and measures underlying pricing pressures, unexpectedly declined from a record level to 5.6%. Additionally, the labour market appeared to be tightening, with the jobless rate dropping to 6.5%. Germany had the lowest jobless rate among bloc members, at 2.8%.

US:

As expected, the Fed increased interest rates by 25 basis points on May 3, bringing the benchmark fed funds rate to a target range of 5.00% to 5.25%. The Federal Open Market Committee (FOMC) statement omitted the previous language about the anticipation “that some additional policy firming may be appropriate” and emphasised that future actions would depend on the incoming data and economic developments. During the press conference, Fed Chair Powell strongly suggested that the fed funds rate may be near its peak level for this cycle. However, Powell also kept the option for a further monetary tightening open, stating that “a decision to pause was not made today.” In a world where inflation does not come down quickly, rate cuts “would not be appropriate,” according to Powell.

The non-farm payrolls report, which was released on May 5, also showed strength in the labour market, with the economy adding 253,000 new jobs in April, higher than the consensus estimate of 179,000 and the 165,000 job gains recorded in March.