Welcome to our #166 weekly newsletter.
“For women taking control of their financial future”
-Jana Hlistova
From The Purse
In this week’s newsletter, we focus on UK inflation accelerating to ‘dangerously high levels’ at 10.4% in February. UK’s inflation is higher than in all G7 countries.
On Thursday, the Bank of England hiked interest rates for the 11th consecutive time since November 2021 by 25 basis points.
Despite the global banking instability, the BoE is focused on taming inflation.
And don’t forget to listen to The Purse Podcast interview with independent economist Shaun Richards. We talk about the banking crisis, inflation, interest rates and what’s ahead for the UK.
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And you can review the news in brief so you stay on top of global financial, economic and investing trends.
I hope you enjoy this week’s newsletter.
Until next week,
Jana
UK inflation at 10.4%: Bank of England hikes base rate amid global banking instability
The focus is on taming inflation despite global banking sector instability
According to the latest data, UK inflation has accelerated to ‘dangerously high levels’ (10.4% in February), which is why the Bank of England (BoE) increased the base rate by 25 basis points to 4.25% on Thursday, as reported by the Financial Times.
The UK inflation rate was higher than what the BoE and economists had forecast, as polled by Reuters.
Ministers have insisted that the BoE should focus on taming inflation, irrespective of the strain rising interest rates have put on the global banking industry.
Although there is no signs that UK banks are affected so far, central banks claim that maintaining financial stability will not get in the way of taking measures to dampen inflation.
But the tensions in the financial markets are likely to make many banks weary of lending, which should reduce the need to increase interest rates further and will have a deflationary effect.
Why? Spending could be limited in companies and consumers who can not access lending for growth or say, mortgages.
The the acceleration of core and service inflation suggests that ‘there may be more domestically generated inflation pressure than the Bank has assessed to date’, according to Krishna Guha, economist at the investment bank advisory company Evercore.
However, it is possible that the interest rate hike could end up pushing inflation below target (2%) further down the line.
The BoE interest rate hike is the 11th consecutive since November 2021, increasing the base rate by nearly 425 basis points (4.25%).
Whilst UK energy prices have been falling, this has not been offset by core or services inflation.
UK inflation is higher than in all other G7 countries. In the US, annual inflation eased to 6% in February (from a peak of 9.1%), and it slowed to 8.5% (from a peak of 10.6% in the eurozone).
News in Brief
Financial news
10 year US Treasury yields fall to 3.32%, lowest since September 2022 due to banking stress. Banking crises always have a deflationary effect.
US Federal Reserve raises benchmark rate 25bps to 4.75%-5% target range as expected. Officials still project the fed funds rate will end 2023 at 5.1%. Will not end QT. Fed will continue same pace of reducing treasury, MBS holdings.
Deposits have been declining for both small and large banks since the Fed began to raise rates in March 2022.
Run into US money market funds continues. Assets rose by another $117bn in past week to hit ATH. Inflows will accelerate after rate hike. It is bank run in slow motion. Only interest rate cut can stop bleeding at banks.
Small US banks see a record drop in deposits after SVB collapse. 25 largest banks saw deposits increase $67bn, while smaller banks experienced a $119bn deposit outflow.
End of QT? ECB balance sheet rose in the past week by €2.5bn to €7,831.9bn as other claims on euro area credit institutions denominated in euro jumped. ECB's total assets now equal to 59% of Eurozone GDP vs Fed's 33% and BoJ's 133%.
Investors search for the next weak link in European banking after Credit Suisse. Deutsche Bank doesn’t resemble Credit Suisse or Silicon Valley as Deutsche is solidly profitable, but is still vulnerable.
UK inflation jumps unexpectedly to 10.4% in February. Economists and Bank of England had forecast a decline from January to 9.9%.
Bank of England (BoE) hikes policy rate by 25bps to 4.25%, highest level since 2008 as expected. Rate is still way below inflation.
Cathie Wood suffers double blow as drama hits Coinbase, Block. Two companies among top 10 holdings in flagship fund ARK Innovation. Block plunged as much as 22% after short attack by Hindenburg. Coinbase shares fall after SEC warning on potential legal action.
Crypto: bitcoin, ethereum, DeFi & NFTs
Crypto, and broader financial markets, were roiled by the Fed this week. Volatility ticked higher during Chair Powell’s news conference on Wednesday.
It's the liquidity, stupid! Bitcoin usually follows the US M2 money supply trend. Now bitcoin has already risen, although the money supply trend has not yet turned. But investors expect M2 to turn soon.
Bitcoin was trading above $27,600 and is up about 0.4% over the past week. Ether slipped 2.1%.
Several prominent (US) Republicans rebelled against the idea of a Central Bank Digital Currency (CBDC), essentially a dollar-pegged cryptocurrency that would be issued by the Federal Reserve. (CBDCs can be issued every central bank around the world).
Arbitrum settles into top 40 Coins with 81% of airdrop claimed. Most of the eligible users of the popular Ethereum scaling solution didn’t wait to claim the free Arbitrum (ARB) tokens.
Custodia Bank's membership denied for ties with crypto markets, say US Fed. The United States Federal Reserve released an 86-page report on March 24 detailing the reasons for denying Custodia Bank's application for membership.
Crypto exchange Coinbase shares tumble 16% after SEC enforcement notice. The regulator issued Coinbase a Wells notice on Wednesday, informing the company that it is planning future enforcement action against it.
Coinbase tapping into innovation-friendly Brazil amid US regulatory crackdown. The focus on Brazil is part of the company's drive to go deep into markets with the most potential.
The SEC also accused Justin Sun of violating federal securities laws. The regulator alleges he conducted a scheme to artificially inflate the trading volume of TRX in the secondary market. The regulator also accused eight celebrities of violating securities laws in touting related tokens. The list included Lindsay Lohan
The Purse Podcast
We cover the following in our conversation:
The banking crisis: how did we get here?
How are the central banks and governments responding?
Inflation & interest rates
And what's ahead?
Please enjoy! Listen on Apple Podcasts and Spotify+
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We’d love to hear from you. Get in touch with Jana via the The Purse website or tweet @jointhepurse and janicka.
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