Weekly Market Update- Week Ending 05/05/2023

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Whilst earnings season continued, attention this week turned to the Federal Reserve (Fed) which met to decide interest rates in the United States. In line with expectations, the US central bank raised interest rates 0.25% to a target range between 5% and 5.25%, which sees interest rates in the States at their highest level for 16 years.

Fed Chairman, Jerome Powell, signalled (without any promises!) to markets in the press conference that a pause could now be on the cards, as they work to analyse data to see how individuals and businesses are dealing with the recent rise in the cost of money. Powell said, “There’s a sense that we’re much closer to the end of this than to the beginning that, as I mentioned, if you add up all the tightening that’s going on through various channels, we feel like we’re getting close or maybe even there, but again, that’s going to be an ongoing assessment.”

The Fed faced a bit of a dilemma. Inflation, whilst trending lower, remains significantly above target levels. This led policy members to want to tighten the supply of money further by raising interest rates. It is clear, however, from the continued difficulties seen within the regional US banking sector, that the sharpness of this hiking cycle is causing instability. The impact on the US economy looks likely to be seen in the months ahead, with banks more likely to hold back on new loans or tighten the requirements when refinancing debt.

All eyes are now on the Bank of England who meet next week, announcing their decision on Thursday. Market expectations point towards another 0.25% increase, which would mark the 12th straight rise.

This week, it was the turn of oil majors BP and Shell to release their Q1 earnings data. Shell announced record profits of $9.6bn for the quarter, reigniting the debate around increasing windfall taxes. Shareholders will enjoy a bumper distribution of those profits with $2bn allocated in dividends and $4bn to be used to fund share buybacks in the quarter ahead. BP also beat expectations with a $5bn quarterly profit, but disappointed investors by scaling back its buyback program to $1.75bn from $2.75bn. Despite the strong profit numbers, the stock was punished on the day, closing down some 9% on the news.

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