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Hikes Continue in the US 

5% for one year. No wonder stocks are under pressure when the 1yr Treasury note yields more than 5.1%, its highest in 22 years. FOMC minutes signalled more rate hikes – and remember those minutes were before the hot data that hit the bull rally in recent days.   

  

Is it Working? 

Minutes detailed that "while there were recent signs that the cumulative effect of the Committee’s tightening of the stance of monetary policy had begun to moderate inflationary pressures, inflation remained well above the Committee’s longer-run goal of 2 percent and the labor market remained very tight... Against this backdrop, and in consideration of the lags with which monetary policy affects economic activity and inflation, almost all participants agreed that it was appropriate to raise the target range of the federal funds rate 25 basis points...  

 

Some Looking for Even Further Action 

Many of these participants observed that a further slowing in the pace of rate increases would better allow them to assess the economy’s progress". "A few" wanted to raise rates by 50bps as it would "more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance”, whilst “a number of participants observed that financial conditions had eased in recent months, which some noted could necessitate a tighter stance of monetary policy."   

  

Inflationary Pressure Driving the Car 

I think it’s noteworthy that the minutes showed members are worried about the easing of financial conditions that has taken place and warned that inflation was still way too high, at the same time as Jay Powell said financial conditions had tightened and declared disinflation was now the order of the day. It’s all very higher for longer. Meanwhile St Louis Fed president James Bullard said the market was over pricing risk of recession, and that the Fed should only slow down once it’s hit the terminal rate.  

It can’t go on forever – American consumers are loading up on debt rather than cutting back, only making problems worse when it does all burst – an even bigger and more damaging recession could be on the way.  

  

 

Equity in Europe Mixed

A mixed start for European equity markets on Thursday morning – London down a bit more, Frankfurt higher by around half a percent. A slew of earnings from FTSE 100 companies saw Rolls-Royce soar 16% after reporting a 57% jump in profits and the new CEO signalled a 7-point plan for restructuring. Anglo American shares fell slightly after it took a $1.7bn writedown on its UK fertilizer mine. BAE Systems was also down despite a nearly 10% rise in underlying profits and a record year for new orders of £37bn. WPP rose 4% after it said revenues would grow 3-5% in 2023, although this is down from 7% in 2022.  

 

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