International markets ended the quarter on a firmer footing, despite market volatility, caused principally by the collapse in March of Silicon Valley Bank (SVB), Silvergate and Credit Suisse. This negativity receded fairly quickly as US policy makers stepped in promptly to secure deposits and restore confidence and stem any contagion effect in the US banking markets.
All three of the big US indices ended the month firmer, with the tech sector particularly buoyant at month end as the S&P 500 closed higher by 3.5%, the Dow Jones up by 1.9% and the Nasdaq by 6.7%.
US economic data continued to be broadly in line with market expectations as the CPI print decreased from 6.4% in January to 6.0% in February, with core CPI also coming in at 5.5% in February vs the 5.6% reading previously recorded for January. Although January retail sales rose by 3.0%, this was reversed in February, as sales declined significantly, printing at -0.4%, which was in line with consensus. Personal consumption expenditure (PCE) rose by 0.3% for February, which was lower than the January reading of 0.5%, and beating the consensus expectation of 0.4% rise, hinting that US inflation may be slowing. Note too, that the Federal Reserve uses the PCE reading as its preferred inflation gauge.
The Federal Reserve again raised rates by 0.25% in March, with Chairman Powell emphasising that the process of curbing inflation and bringing it back in line with the 2% target may take longer than anticipated. As the major central banks continue to face the delicate balancing act of fighting inflation without running the risk of compromising financial stability, the comments on the tighter lending conditions prevalent in the US and in Europe, continue to reinforce the probability of slower economic growth in developed markets.
European markets proved to be a mixed bag during March as the FTSE was the only one of the big three indices to trend the month lower by 3.1%, as inflation surprised on the upside, after easing for the previous three months. UK inflation printed a reading of 10.4% for February with food and energy costs continuing to be the big driver, which, as expected, led to the BoE raising rates by 0.25% from 4% to 4.25%.
Both German and French markets ended the month stronger as the Dax closed higher by 1.7%, and the Cac40 by 0.75%. Inflation remains a concern, however, as the rate for the Eurozone printed a reading of 8.5% vs a previous level of 8.6% for January. As in the UK, food and energy prices continued to be the main drivers of inflation, with the German numbers printing at 8.7%, while food inflation increased by almost 22% and energy costs by over 19%. This pattern was mirrored in the French inflation numbers.
The banking default concerns did not leave Europe unaffected, Credit Suisse being tarred with the same brush and initially being extended liquidity by the Swiss Central Bank, but subsequently taken over by UBS. Negative market sentiment exacerbated Credit Suisse’s challenges with the bank already having received an adverse audit. Although some stability has returned to the market, investor confidence is often hard earned, and when it impacts financial stability, the contagion effect remains a concern.
As with the central banks in the US and the UK, the European Central Bank followed the herd in raising rates, but by 0.50%, bringing its main deposit rate to 3%, but still lagging the US rate hike cycle by a number of months. Headline inflation moderated, although core inflation continues to show broadening pricing pressure, especially in the service area, which remains a concern.
Asian markets ended the month firmer, with Chinese markets producing a mixed bag with the Hang Seng up by over 3%, while the Shanghai Composite ended the month lower by 0.2%.
On the economic front, factory activity in China beat market expectations for the month as the manufacturing PMI came in at 51.9 versus a previous reading of 52.6. Non-manufacturing PMI came in at 58.2 vs a previous reading of 56.3. The Chines government also signalled a growth target of around 5.0%, which appears to be a more achievable goal considering the current world economic climate. Domestic inflation in China remains contained and the People’s Bank of China has cut the reserve requirements by their banks by 25bps.
Japanese markets rose by 2.2% as the country’s inflation numbers fell to 3.3% in February vs the January reading of 4.3%, even as transport, electricity and water costs all eased. The challenge for the new governor of the Bank of Japan, Ueda Kauo, is to convince markets that Japan can control inflation, as the moderation was attributable to the energy subsidies by government.