Tensions in the banking sector increase the likelihood of a recession during the year, according to chief investment officer Guy Wagner at asset manager BLI - Banque de Luxembourg Investments.
Nevertheless, prior to the onset of the banking turmoil, the resilience of the global economy was still in evidence, with service activities continuing to benefit from robust household demand due to continued full employment in most countries, Wagner and his team said in their latest monthly market report.
“In the industrial sector, the pace of growth is slowing after the boom of 2021, but remains in positive territory for the time being,” said Wagner. “In China, the reopening of the economy is leading to an acceleration in growth, as expected. Even the real estate sector, which was under severe pressure throughout the past year, is showing initial signs of stabilization.
“In the coming months, however, the global economic slowdown is likely to intensify due to the increasing reluctance of banks to grant credit in a climate of general mistrust regarding the safety of bank deposits, following the collapse of Silicon Valley Bank in the United States and Credit Suisse in Europe.“
Persistent core inflation
Although inflation rates continue to ease, the core indices, excluding energy and food, are proving persistent. In the US, headline inflation fell from 6.4% in January to 6.0% in February, with core inflation virtually unchanged, falling from 5.6% to 5.5%.
Despite the turmoil in the banking sector, the US Federal Reserve raised the target range for the federal funds rate by 25 basis points in March to 4.75% - 5.00%. However, Chairman Jerome Powell was less categorical about further monetary tightening, saying that the decision now depended on economic and financial developments, said the BLI note.
In Europe, the central bank raised its main policy rate by 50 basis points to 3.5%. President Christine Lagarde was even more vague than her US counterpart about future interest rate developments, preferring to refrain from guiding the markets in view of slowing inflation and the risk of a crisis of confidence in the financial sector.
General uncertainty in the banking sector
“Uncertainties in the banking sector triggered the classic reflex of investors to turn to safe-haven assets,” said the Luxembourgish economist. Thus, government bonds rose on both sides of the Atlantic, with long rates heading down again. Over the month, the benchmark 10-year rate fell in the US, in Germany, in France, in Italy and in Spain.
Stable stock markets
“Despite fears of a new banking crisis, stock prices proved to be very resilient during the month of March, said BLI. The decision by the US authorities to guarantee the entirety of Silicon Valley Bank’s deposits, as well as the takeover of Credit Suisse by UBS, prevented a widespread panic reaction in the stock markets.
At the sector level, technology stocks were particularly popular, with the Nasdaq posting its best quarterly performance since Q2 2020. “In March, technology, communication services and utilities were the strongest performers, while energy, real estate and especially financials posted negative returns,” said Wagner.