Weekly Market Update- Week Ending 03/02/2023

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This week saw both the Federal Reserve (Fed) and the Bank of England (BoE) meet to set interest rates. First up on Wednesday, the Fed increased interest rates by 0.25% to between 4.5% and 4.75%, in line with market expectations. Fed chairman Jay Powell acknowledged that there was progress being made in the battle against inflation but warned that despite interest rates now sitting at the highest level since 2007, “ongoing increases” would be required to bring it back towards the 2% target. The market reacted positively to the news, with technology or ‘growth’ stocks seeing the largest gains.

Although investors are very keen to see the so-called ‘Fed pivot’ (switching from raising rates to lowering them), it is much more likely we will see a ‘Fed pause’ in the coming months, as it adopts a wait-and-see policy to observe the effects of one of the steepest monetary tightening cycles in history.

In the UK, having raised rates more gradually than the Fed in previous months, the BoE opted to increase interest rates by 0.5% to 4% to a 14-year high. The BoE said that although the UK will enter a recession in 2023, they now anticipate it to be shallower than expected. The next move for interest rates in the UK is an area of much debate. With inflation still sitting at over 10%, I expect further increases will be needed in the coming months, with perhaps 4.5% being the terminal rate.

Earnings season continued this week with investors keen to see how higher interest rates and falling consumer confidence are affecting businesses. One sector which continues to see growth in earnings is energy, with the vast majority of oil majors so far reporting strong numbers. On Thursday, it was the turn of Shell, who reported its highest-ever yearly profit at almost £40bn – double the figure of 2021. Income investors cheered the proposed 15% increase in its quarterly dividend and the firm also announced a $4bn share buyback program. It appears that Shell is also doing a good job of fixing the roof while the sun is shining, with debt falling to $44.8bn at the end of 2022 from $52.6bn a year earlier.

The bumper profits experienced since the spike in oil prices a year ago have caused an outcry among the public who face soaring energy bills and attracted attention from cash-strapped governments looking to raise revenue by introducing windfall taxes. Shell reported that it expects to pay some $2.3bn in such windfall taxes (EU and UK) on its 2022 earnings.

John Naylor, Chartered FCSI – Head of Investment Committee
John Naylor