Interest Rate Hikes Overshadowed by JPMorgan Takeover


Interest Rate Hikes Overshadowed by JPMorgan Takeover

Monday, May 7, 2023 By Vincent David-Robin

Both the US Federal Reserve (the Fed) and the European central bank (ECB) raised interest rates last week by 25 basis points (bp) to 5% – 5.25% and 3.25% respectively. The Fed is expected to stop while the ECB could raise rates further, to 3.50% or 3.75%. These should have been the highlights of the week.

But that was not the case. The markets were disturbed again. This time, with the quasi bankruptcy and take-over of First Republic Bank by JPMorgan.

US Market Flattened Out

It did send US equity markets close to 3% down mid-week and recover almost unchanged by the end of the week; with mega caps stocks (Apple, Microsoft, Google and so on) leading the fray. European markets followed the same pattern.

US fixed income markets reacted in a similar manner, pricing 80bp rate cuts by the end of 2023 and close to another 70bp by the end of 2024. In other words, it could drop from the current 5% mark, back down to 3.5% by the end of next year.

Only on Friday did the US employment numbers sow some doubts in the mind of participants. Employment and wage growth were better than expected. This raised questions as to how fast inflation could recede; and whether the Fed would then, indeed, cut rates so fast.

Tepid Growth in China

The industrial commodity space as well as oil have been trading rather poorly. This was a consequence of China’s re-opening not quite being the blockbuster that many had expected. Tepid growth in manufacturing and exports have a direct impact on the need for metals and energy.

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