SNAPSHOT2 min read

Market update – February 2023

US interest rates may be close to their peak.

USA NY Bridge

Markets start the year on good form

Equities and bonds have both continued the recovery that began late in 2022, as investors anticipate a peak in interest rates and a decline in inflation. As at the end of January, global equities were 14% above the low point of last year and global bonds a more modest 5% (both in GBP). There is certainly some justification for the better performance. Recent data suggests that core US inflation is falling and that the economy is coping with interest rate rises better than many anticipated. China’s Covid exit wave also appears to have been less disruptive than feared and the country may well provide a boost to global growth this year.

Central banks nearing end of rate rises

The start of the month was a busy one for monetary policymakers, with the Fed, the Bank of England and the ECB all increasing interest rates. Markets added to January’s gains in response to the Federal Reserve’s press conference. Fed Chair Jay Powell said that the “disinflationary process” had begun and suggested that a peak in interest rates was very close at hand. However, markets may be too optimistic about the pace at which inflation will fall and the level at which it will settle. Both the Fed and the BoE noted labour markets remained very tight, with the Bank of England warning that “risks to inflation are skewed significantly to the upside.”

Debt ceiling battle looms

While there are no national elections in major economies in 2023, politics could still be a source of market volatility. In particular, negotiations over the US “debt ceiling” could turn into a flashpoint over the coming months. The US has a legal limit on the amount of debt it can issue and any increase requires Congressional approval. With a divided Congress, this may be difficult to achieve, raising the prospect of a US government shutdown. In 2011, the near-failure to reach an agreement led to the downgrade of the US credit rating and steep falls in global stock markets. A repeat of that year’s brinkmanship could once again raise broader worries about government debt. As the UK found last year, these can be a source of significant economic disruption.

Portfolio positioning

While we have not been adding to our equities allocation, our core exposure has benefited from the rally of the past few months. We would prefer to see softer labour markets and more evidence of falling inflation before adding to the asset class. In the meantime, we have also been benefiting from our exposure to high-quality corporate bonds. We believe that credit markets can deliver attractive returns with lower risk than equities. High levels of inflation in the UK have made meeting inflation plus return targets more challenging in the shorter term. Despite this, we remain confident in the ability to meet inflation plus targets over the longer term.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


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Global economy
Energy transition

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.