Markets Digest Ongoing Series of Rate Hikes | Daily Market Analysis

Key events:        

• UK – Retail Sales (MoM) (Feb)
• UK – Composite PMI   
• UK – Manufacturing PMI   
• UK – Services PMI  
• Eurozone – EU Leaders Summit     
• USA – Core Durable Goods Orders (MoM) (Feb)
• Canada – Core Retail Sales (MoM) (Jan)

The Bank of England raised its rate by 25 points to 4.25%, just in line with market expectations. For the third meeting in a row, two members voted to maintain rates, but they were opposed by seven more hawkish members.

In a commentary on the decision, BoE noted the improved global growth outlook and now expects UK GDP to grow in Q2, compared to a 0.4% decline previously. Separately, the fall in gas and oil futures prices is noted.

The Bank of England called the latest unexpected spike in inflation temporary and continues to see a significant slowdown in inflation during the year. Not least behind this is the recent budget changes.

The Bank of England noted that further policy tightening may be needed with evidence of further inflationary pressures on wages and service costs. This sounds like a relatively dovish commentary, containing more hope than confidence in a sustained return to the 2% target for inflation and financial sector resilience. Indirectly from the regulator's rhetoric, it follows that the base case scenario is still to keep rates unchanged going forward.

GBP/USD initially reacted positively to the rate decision, returning to the highs of the day at 1.2340, but at the time of writing has rolled back below 1.2280. At the same time, the dynamics of the pound against the dollar are largely determined by the latter.

As for Wall Street, the bank stocks stabilized after the sharp decline on Wednesday, which was provoked by the words of the head of the U.S. Treasury Janet Yellen saying that the U.S. authorities were not just going to give the banks a "blank" check as a deposit guarantee. But the market doesn't seem to believe that, just as it doesn't believe the FOMC median forecast that the federal funds rate will be at 5.1% at the end of the year. At least the futures market believes it will be almost 100 bps lower, although Fed Chairman Jerome Powell said during a press conference that lower interest rates this year are not a baseline scenario.

On Wednesday, the Fed raised its federal funds rate target by 25 bps to 4.75-5.00%, as expected. The FOMC members' median forecast for the rate at the end of 2023 remained at 5.1% and rose to 4.3% at the end of 2024 from 4.1% in the last (December) forecast. The accompanying statement said that additional rate hikes are possible.

Negative factors for the market include problems in the U.S. banking sector, which increases the risk of recession, as well as steadily higher production in Russia than would be expected after the introduction of export restrictions on oil and petroleum products from the West. In addition, U.S. commercial black gold inventories are at their highest level since May 2021, which is also weighing on prices.

Gold prices are back to last week's close: the metal is supported by both demand for protective assets and the general weakness of the dollar.

At the same time, Chinese copper output during January-February stood at 1.945 million tons, up 10.6% year-on-year. The average daily production reached a record high of 32.966 thousand tonnes.