Weekly review 19 June 2023: Central banks leading the way into summer


The European, US and Japanese central banks each held their interest rate meeting last week, during what is known as the central bank super week. Sentiment in the western world continues to be hawkish, as expected, whereas Asia is carrying on in its own groove.

While the week was full of central banks’ interest rate meetings, it did not bring any earth-shattering surprises. The interest rate level rose only slightly, and corporate loan credit spreads tightened. The euro appreciated against the US dollar to 1.09.

Equity markets developed favourably last week, with positive performance in all key markets. The stock price rise has recently been driven by a handful of US tech companies, leading to the outperformance of the growth factor and the sectors in which these companies operate. The rise in equity markets has raised valuation levels. The USA finds itself above the market’s historic average, with the average P/E ratio at around 20. Europe is currently below its historic average, with the average P/E ratio at around 13. The valuation difference between the USA and Europe is significant but can partly be explained by the industry structure: the USA has more technology companies with higher valuations.

Last week’s most important data disclosures were the latest inflation figures from the USA and Europe. US inflation in May was +4.0 per cent and core inflation, meaning inflation less energy and food, +5.3 per cent. Inflation in the euro zone in May was +6.3 per cent and core inflation +5.3 per cent. Inflation is thus moderating on both sides of the Atlantic but still remains clearly above the target set by the central banks.

The US central bank (Fed) started the central bank super week with its meeting on Wednesday. The Fed paused its interest rate hikes and kept its monetary policy intact, in the 5.00–5.25 per cent range, as expected. The markets’ attention was drawn to the comments concerning the future outlook, which were slightly more hawkish than expected. For example, the members of the Fed’s Board of Governors projected a higher key interest rate level compared to earlier. The median of the members’ independent projections (dot plot) indicates that two more hikes are ahead during the rest of the year. However, the Fed Chair Jerome Powell stressed that future decisions will depend on the economic data. According to Powell, the pause in the interest rate hikes gives the central bank time to assess how the measures already carried out will effect the economy.

The European Central Bank (ECB) raised its key interest rate by a quarter-point, as expected. The new deposit facility rate is 3.5 per cent and the new rate on the main refinancing operations is 4.0 per cent. The markets were especially keen to hear the ECB meeting’s future projections. The ECB’s President Christine Lagarde expects that the key interest rate will be raised again in the July meeting and possibly further in the autumn. Lagarde’s message was reinforced by the updated inflation projection, in which the core inflation projection for 2023–2024 was substantially raised. In addition, the central bank confirmed its previously communicated plan to discontinue, as of July, the reinvestments of the securities purchased under the asset purchase programme (APP). The decision will accelerate the shrinking of the ECB’s balance sheet.

The Japanese central bank made no changes to its monetary policy. The central bank thus kept its key interest rate at zero, as expected, and will continue its monetary stimulus policy. After the decision, the yen continued to weaken. The yen has depreciated against the euro by some 10 per cent since the beginning of the year.

The Chinese central bank surprised the markets with a minor interest rate cut. In addition, the government announced additional stimulus measures for the country’s real estate sector. The Chinese markets reacted to the news in a positive way.

The UK’s central bank will be next in line on 22 June. The markets are expecting an interest rate hike of a quarter-point from the current 4.5 per cent to 4.75 per cent.

The weekly review will take a summer break and the next review will be published in August. Wishing you a great summer!