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FTSE 100 eases off highs as dollar falls after US CPI; BoE boss talks banks

Published 12/04/2023, 14:30
Updated 12/04/2023, 14:41
© Reuters.  FTSE 100 eases off highs as dollar falls after US CPI; BoE boss talks banks
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Proactive Investors -

  • FTSE 100 below day's peak of 7,859.67
  • Wall Street seen higher after inflation date
  • March US consumer price index falls to 5%

Banking on Bailey

Bank of England Governor Andrew Bailey has said bank reforms enacted after the global financial crisis of 2007-09 worked during the recent banking turmoil, but there were questions about whether banks should set aside bigger cash buffers in future, according to a Reuters report.

In a speech on Wednesday to the Institute of International Finance in Washington, where he is attending International Monetary Fund meetings, Bailey said: "Today I do not believe we face a systemic banking crisis. When I look at the UK banks, they are well capitalised, liquid and able to serve their customers and support the economy."

Bailey, however, echoed calls from his predecessor Mark Carney by saying there might be questions over the size of liquidity buffers required of banks in order to tide them over short-term shocks.

"We can’t assume that, going forwards, the current answer on the total size of liquidity protection is the correct one," he said. "We saw with Silicon Valley Bank that with the technology we have today – both in terms of communication and speed of access to bank account – runs can go further much more quickly. This must beg the question of what are appropriate and desired liquidity buffers that create the time needed to take action to solve the problem."

Bailey said future size and make-up of banks' liquidity buffers would influence how far central banks go in reducing the size of the bond holdings they have acquired since the financial crisis and which grew further during the coronavirus pandemic, Reuters noted.

Risk in Fed overtightening

The FTSE 100 held firm and US stock indexes extended their gains after headline inflation in the US came in at an annual 5.0% in March, below the consensus forecast for 5.1%, and marked another fall back in inflation from 6.0% in February.

Daniel Casali, chief investment strategist at wealth manager Evelyn Partners noted that the annual headline inflation rate has now receded for nine consecutive: “Base effects, where inflation rose sharply on a monthly basis in the first half of 2022, should continue to drag on the annual rate, at least up until June. Critically, lead indicators such as falling job openings and lower selling prices from the National Federation of Independent Business small business survey, indicates that core CPI inflation is set to slow over the coming months."

He said: “The risk for the Fed now is that it overtightens policy and this leads to a financial crunch in the banking sector, which could in retrospect at least, make the failure of Silicon Valley Bank and Signature Bank last month the canary in the coalmine. Although there are still pockets of inflation in the economy, the Fed Funds rate is now higher than Fed forecasts of underlying inflation, and this positive real interest rate indicates that policy is already restrictive.

“However, the Fed will be aware that there are inflation drivers that are outside of its control, particularly energy prices. OPEC’s recent production cut has given a boost to crude oil prices and complicates the job of the Fed to bring down inflation. So, despite the hawkish rhetoric from FOMC members, the Fed may be reluctant to raise rates too far."

Fed to ease off hiking

More on today’s US inflation figures, and Naeem Aslam, chief investment officer at Zaye Capital Markets believes the time has come for the Fed to ease off increasing the interest rates.

“Moving ahead, we are going to hear a lot of commotion about the Fed’s next move, and odds are that the Fed will confess that inflation has slowed and that they may halt their hike cycle.”

Gold prices shot up drastically, gaining US$5.39 since the announcement, or 0.25%, with the precious metal now worth US$2,027 per ounce.

Prices have risen as spectators predict a much weak dollar in anticipation the Fed will stop raising rates.

FTSE 100 had initially reacted positively, shooting up 20 points immediately after the data was released, before retreating 10 points.

London’s blue-chip index is currently up 59 points, or 0.76%.

Read more on Proactive Investors UK

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